ASHISH GUPTA explains how income from a property is treated when it is transferred to a family member. In some cases, a person who owns a large property may want to distribute it among his children, without physically creating boundaries or dividing the property.
This division can be made effective during the lifetime of the owner of the property, or one may mandate it to be effective after his demise so that the remaining family members get a share each without physically dividing the property.
This can be done through various means, including a gift deed or will. However, in case it is done during the lifetime of the owner, some income tax provisions need to be taken into account. Such a transfer, although out of love and affection, may be perceived as distribution of assets so as to reduce income and the corresponding tax.
The term 'transfer' in the Income Tax Act includes sale, exchange, relinquishment of asset, extinguishment of rights in an asset, or compulsory acquisition under law. Under Section 64 of the Income Tax Act, clubbing provisions have been provided. According to the Income Tax Act, while computing the total income of an individual, any income that arises directly or indirectly from assets transferred without adequate consideration are to be clubbed. If a person transfers a house without consideration to his spouse or a minor child, he i s deemed to be the owner of the house. As such, he is taxed accordingly.
In case a person transfers a house without consideration to his son's wife or child, he will not be deemed to be the owner of the house. However the income earned from the house property will be included in the income of the transferor. The transferee will continue to be treated as the owner of the house and the income computed in his hands is included in the income of the transferor.
In addition, in case an asset is transferred by an individual, directly or indirectly, without adequate consideration, to a person or association for the immediate or deferred benefit of his son's wife, the income arising from that property is included in the total income of the transferor. Similarly, where a house is transferred by an individual for the immediate or deferred benefit of his spouse, the income arising from the transferred house is included in his total income.
As such, in case you buy a house in your wife's name but she has not monetarily contributed to the purchase, the rental income from that house will be treated as your income and taxed at the applicable rate.
In case an individual gifts cash to his wife, who in turn purchases a house with the money, the individual will not be treated as the fictional owner of the property. The taxable income of the wife from the property is included in the income of the individual in case she uses the house for her own residential purpose.