OPEN APP
Home / Opinion / What’s in a name: long-term capital gains exemption

The Income-tax Act has two provisions for exemption of long-term capital gains on reinvestment in a residential house. While section 54 grants exemption of such gains arising on sale of a residential house where the gains are reinvested in a new residential house, section 54F provides for exemption of such gains arising on sale of any other asset where the net sale consideration is reinvested in a new residential house. Both these sections have various conditions which need to be fulfilled in order to claim the benefit of the exemption.

An interesting issue which arises is whether the benefit of the exemption would be available in a situation where the new residential house is either purchased by the taxpayer in joint names with some other close relative, or if it is purchased only in the name of a close relative, such as a spouse or child, and not in the name of the taxpayer who has earned the capital gains.

Income tax law does recognize the concept of beneficial ownership of an asset, and where an asset is held in joint names, but funds of only one of the joint owners has been invested in the purchase of such an asset, income tax law recognizes the asset to belong to the joint owner who has invested the money in the acquisition of the asset. It recognizes the fact that other joint owners names have been added only for convenience, and that other joint owners are not the owners of the asset for income tax purposes. Therefore, various courts, including the Delhi and Karnataka high courts, have taken the view that even if the new residential house is purchased in the joint names of the taxpayer and his spouse or other close relative, the taxpayer cannot be denied the benefit of the exemption available for long-term capital gains on reinvestment in a residential house. The courts have also held that the benefit of the exemption cannot be reduced by treating the taxpayer as only a partial owner of the new house, jointly with other joint owners, unless other joint owners have contributed to the cost of the new house.

The position is a little more complex when it comes to purchase of the new house by the taxpayer in the single name of a close relative, say, a spouse or a child of the taxpayer. A few high courts, including the Delhi high court, have taken the view that purchase of the new house in the name of the taxpayer’s spouse will also qualify for the benefit of the exemption. The courts have noted that the law does not require that the new house has to be in the name of the taxpayer—it merely requires purchase or construction of the new house by the taxpayer, which is satisfied if the funds arising from the sale of the old house are utilized for such purchase or construction of the new house. These courts have also taken the view that since these provisions are exemption provisions, they should be interpreted in a manner to the benefit of the taxpayer, particularly when two views are possible in the matter.

The Nagpur bench of the Bombay high court has, however, taken the view that construction of a new house in the name of the taxpayer’s son would not qualify for the benefit of the exemption. The court has viewed the transaction as a means of transfer of the house, which is normally not permissible for a three-year period.

Interestingly, the Madras and Andhra Pradesh high courts have taken the view that where the purchase or construction of the new house was completed by the legal heirs after the death of the taxpayer who had earned capital gains, the benefit of the exemption was still available since the taxpayer had already commenced the activity of purchase or construction of the new house during his lifetime.

If one looks at the different views taken by the courts, one can perhaps reconcile them on the ground that in any case the income of the spouse arising from gift of any assets to the spouse is to be clubbed with the income of the taxpayer as well as the value of the house is to be clubbed with the wealth of the taxpayer. Therefore, for all practical purposes, the new house, though it is held in the name of the spouse, is treated as the house of the taxpayer for income tax and wealth tax purposes. It therefore makes sense to grant the benefit of the exemption where the acquisition of the new house is in the name of the spouse of the taxpayer.

Clubbing provisions do not operate in case of assets gifted to major children, and therefore neither the income from the house nor the value of the house are clubbed with the income or wealth of the taxpayer. Therefore, acquisition of a house in the name of a major child is not synonymous with acquisition of a house by the taxpayer for tax purposes.

In any case, whenever a taxpayer is contemplating acquisition of a new house to avail the benefit of the long-term capital gains exemption, given the risk of litigation by the tax department, it is certainly advisable for the taxpayer to acquire it in joint names with the close relative to whom he intends to bequeath the house, whether it is the spouse or a child, and not in the sole name of the spouse or child.

Gautam Nayak is a chartered accountant.

Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.

Never miss a story! Stay connected and informed with Mint. Download our App Now!!

Close
×
Edit Profile
My ReadsRedeem a Gift CardLogout