Can you Save Tax on Capital Gain and Rent by purchasing Flat in name of Wife?

Income tax rules for property acquired in name of wife: When you sell a unit for a greater price or rent it out to a renter, you incur tax liability. Many people buy a house in the name of their spouses in the intention of lowering their tax liability. However, according to the laws, this tax-saving strategy does not function.

Transferring funds to the wife’s bank account in order to purchase an apartment in her name does not exempt the husband from capital gains tax responsibility arising from the sale of such property or from tax liability on income made by renting it. Transferring ownership of a flat to one’s spouse does not relieve the individual of tax burden.

Case 1: When property is transferred into the name of the wife without consideration

When a person transfers a house property to his spouse without adequate payment (or receives money in place of such transfer), such person is assumed to be the owner of the transferred property under Income Tax regulations.

According to Section 27 of the Income Tax Act, an individual who transfers any house property without giving appropriate regard to their spouse is assumed to be the owner of the house property thus transferred.

Furthermore, any rental income or capital gains generated by such transferred property are taxed in the hands of the presumed owner.

Any rental income or capital gains generated by such residential property are taxed in the hands of the individual/deemed owner.

What this implies is that even if you transfer ownership of the flat to your wife without receiving sufficient payment for the transfer, you will still be taxed on any income generated by the property.

Case 2: When a man transfers money to his wife’s account and uses it to purchase an apartment in her name

Assume a man transfers money to his wife’s account and then uses that money to buy a house in her name, making all payments from her account. In this situation, the expert believes that the transfer is of money rather than property. As a result, the clubbing clause of Income Tax Section 64 would apply. Any revenue derived from the sale or rental of such property would be taxable in the husband’s hands.

In this scenario, the transfer is of money rather than home property, therefore the clubbing requirements of Section 64 would apply rather than the considered ownership provisions of Section 27 of the Income Tax Act.

According to the expert, rental income and capital gains derived from such residential property would be taxed in the hands of the transferor (equivalent to Section 27 requirements).

When will the preceding not apply?

Section 27 provisions will not apply if the transfer of house property is undertaken without reasonable consideration or in conjunction with a living apart arrangement.