Concept of Deemed Ownership – Section 27 of Income Tax Act, 1961

Deemed Ownership [Sec. 27]

As per Sec. 27, though the following persons are not the legal owners of the property, yet deemed to be the owners for the purpose of Sec. 22 to 26:

 1. Transfer to a spouse/child [Sec. 27(i)]:

 If an individual transfers any house property to his or her spouse/ minor child otherwise than for adequate consideration, the transferor in that case is deemed to be the owner of the house property so transferred. This would, however, not cover cases where property is transferred to a spouse (or minor married daughter) in connection with an agreement to live apart.

 Note:- Where the individual transfers cash to his/her spouse or minor child and the transferee acquires a house property out of such cash, the transferor shall not be treated as deemed owner of the house property. Such transaction will, however, attract clubbing provisions.

2. Holder of an impartible estate [Sec. 27(ii)]

The holder of an impartible estate shall be deemed to be the individual owner of all properties comprised in the estate. The impartible estate, as the word itself suggests, is a property which is not legally divisible.

3. Member of a Co-operative Society, etc. [Sec. 27(iii)]

A member of a co-operative society, company or other association of person to whom a building or part thereof is allotted or leased under a House Building Scheme of a society/company/association, shall be deemed to be owner of that building or part thereof allotted to him, although the co-operative society/company association is the legal owner of that building.

4. Person in possession of a property [Sec. 27(iiia)]

A person who is allowed to take or retain the possession of any building or part thereof in part performance of a contract of the nature referred to in sec. 53A of the Transfer of Property Act shall be the deemed owner of that house property. This would cover cases where the

a) possession of property has been handed over to the buyer;

b) sale consideration has been paid or promised to be paid to the seller by the buyer ;

c) sale deed has not been executed like power of attorney/agreement to sell/will, etc., have been executed. The buyer would be deemed to be the owner of the property, although it is not registered in his name.

5. Person having right in a property for a period not less than 12 years [Sec. 27(iiib)]

A person who acquires any right in or with respect to any building or part thereof, by virtue of any transaction as is referred to in sec. 269UA(f), i.e., transfer by way of lease for not less than 12 years shall be deemed to be the owner of that building or part thereof. This will not cover the case where any right by way of lease is acquired on month-to-month basis or for a period not exceeding one year.

Set Off and Carry Forward of loss

 

As per Sec. 70 if any person has loss from any house property, such loss can be set off from income of any other house property. It is called inter- source adjustment or intra-head adjustment., e.g., Mr. X has two houses; there is loss of Rs. 34,000 from one house and income of Rs. 80,000 from other house, in this case, loss from one source (house) can be set off from income of the other source (house).

As per Sec. 71 unadjusted loss can be set off from incomes of other heads but as per Sec.58 (4), such loss can be set off from casual income. It is called inter-head adjustment., e.g., Mr. X has loss from house property, Rs. 3,00,000 and income from business/profession Rs. 5,00,000, in this case, loss is allowed to be set off but if he has any casual income, loss cannot be set off from casual income.

As per Sec.71B unadjusted loss is allowed to be carried forward to the subsequent years but for a maximum period of 8 years starting from the subsequent to the year in which the loss was incurred and in the subsequent years, loss can be set off only from income under the head house property., e.g., Mr. X has incurred loss under the head house property in the previous year 2012-13. It could not be set off in the same year, it can be carried forward upto previous year 2020-21.

e.g., Mr. X has loss under the head house property of the previous year 2004-05 of Rs. 5,00,000 and income under the head house property of Rs. 5,00,000 in previous year 2012-13. In this case, loss shall be allowed to be set off because it will be allowed to be carried forward upto a period of 8 years starting from previous year 2005-06.

 

Other Aspects

 

i.) Cost of changing house before three years:-

The cost of selling a house is high. If an individual sells a property before three years, sale will attract short-term capital gains tax chargeable at the rate of 30%. In addition, individual will have to pay stamp duty (6-8%), and brokerage (1-2%) on purchase of a new house. Therefore, a house should be purchased and held on to for at least 3-5 years. Liquidity is another factor to consider before an individual decides to change his/her house. It can take time to sell a house at his/her desired price. Even if he/she wants to change house, wait for at least three years so that his/her profit earned becomes long-term capital gain, because, if the gain is long -term capital gain, he/she can save tax by investing it in another house. Short term capital gain must be avoided on house property.

If an individual has transferred/sold any land/building for an amount lesser than the value adopted by the State government’s stamp valuation authority, then the value adopted by the authority will be considered as the sale value for the purpose of computing income-tax. Selling a house even before 5 years is not tax efficient. If an individual sells the house property before 5 years, then the deduction claimed under section 80 C for principal repayment in the earlier years will be withdrawn. This amount will be added to his/her income and taxed as per income-tax slabs.

ii.) Buying a house through loan is better than renting:-

Buying a house is one of the most important decisions of an individual’s lifetime. If an individual has available down payment (typically 15% of house value), then he/she can borrow balance 85% against the house he/she intends to buy. The benefits of home loan interest deduction and repayment of principal will be more than the house rent allowance deduction. Most important benefit in buying a house is the hidden appreciation of the cost of property. Buying a house using home loan is also an investment for retirement. It is like a disciplined saving for his/her safe retirement. An individual can reverse mortgage the house after attaining 60 years of age. Individual monthly expenses could be met by the tax-free amount he/she will receive from reverse mortgage.

iii.) Ownership and possession is a must to claim interest:-

Ownership and possession is a must to claim deduction on home loan interest. An individual has to report income/loss from property only if he/she is the owner of that property. An owner is a person who has the legal title of the property and has the right to receive income from it.

Solely Owned Property:- If an individual is the sole owner of a property, then he/she should report the entire income/loss from the property in his income-tax return.

Jointly Owned Property:- A property which has more than one owner is a jointly owned property. The owners are called co-owners and their share in the property is generally documented in the registry.

Depending on the share, co-owners should report the income from house property separately in their returns. Suppose an individual own 30% of a property, then he/she should report 30% of the income in his/her return. In case of jointly- owned self-occupied property, both he/she and the other owner can separately claim home loan interest deduction up to Rs.1,50,000 in his/her respective income-tax return.

iv.) Property owned by partners of the firm:

It is the partners of the firm taken as a whole who are owners of the house property. But when these partners go by a firm’s name in their collective capacity, and when a particular immovable property or properties happen to be included in the assets of the firm, the income from such property can and should be assessed in the hands of the firm. In law, the joint effects of a partnership firm belong to the firm; a partner has no individual right in any specific asset of the firm and he/she has no exclusive right to possess or use the property. Hence, it is not open to any partner to be assessed as an individual qua his share in the firm.

Be the first to comment

Leave a Reply