Buying New House? Your Wife Can No Longer Help You To Save Tax – This Is What Changed

Tax benefits waived off only if new property is in taxpayer's name.

No tax benefit on resale if new flat is in wife's name
No tax benefit on resale if new flat is in wife’s name

Buying a flat in the name of the woman in the house is a great idea, but only for a long-term investment. If the property is being bought with the purpose of trading, tax benefits will not be applicable: only because the flat is in the woman’s name.

A recent case in Mumbai was where this news was brought into the limelight. The Income Tax Appellate Tribune (ITAT)’s Mumbai bench denied a taxpayer income tax benefits available on a long-term capital gain (LTGC). The concerned person was looking to buy a new flat by selling the old one. But as the new flat was in the name of his wife, he was denied tax benefits.


Here’s What Happened

R Gavankar had purchased a new, second flat jointly with his wife. He did not pay the tax applicable on the LTCG of the old house, on which Income Tax officials demanded 50% of the LTGC of Rs 17.5 lakh. Gavankar’s claim of deduction under Section 54 was denied. He was informed that to avail benefits of tax waive on LTCG under section 54 only if the owner of the second house was the taxpayer, i.e. Gavankar himself.

What does the Income Tax Act say?

According to section 54 of Income Tax Act, if you buy a new property within 2 years of selling an old property, the long-term capital gains tax is waived off the income you earn from selling the old property.

As per the Income Tax Act, if you buy and hold a residential property for a minimum of two years before selling it, the profit earned on that property is called long-term capital gain. After the adjustment for inflation (indexation Benefit), this gain is taxable at 20%. But, if this profit is used in a transaction to buy a new property, the tax is waived off. Clearly, the amount not used in buying the new property is taxable.

Expert’s Advice:

Puneet Gupta, Director at People Advisory Services said that the taxpayers who fall under the jurisdiction of Bombay High Court must be careful to avoid tax litigation. If a taxpayer is looking to buy a house in the name of their children or spouse, it would be good sense to include their own name in the registration as well. In simple words, if a property is bought under the joint names of the taxpayer and his spouse and/or children, then the tax will be waived off of one third the cost of the new property bought.

Some more things to remember:

  1. A social initiative to empower women enables them to buy a property under their own name at a 2 % lower transaction cost.
  2. If the property is in the name of a close relative (son/daughter/wife) who is not earning, and if the property is let out or on rent, the rental income from this property will be treated as the husband’s income and will be applicable to tax at a normal rate.
  3. If you purchase a house in the name of the wife but use your own funds, this means you are using her name as name lender and is considered illegal.
  4. You can make this legal by gifting the money to your wife for her to be able to buy said property. But, this requires the property income to be added to your income and will be taxable.
  5. A loophole in this is to loan your wife the money in exchange for her jewelry of the same amount. In such cases, the rent from the property will not be applicable to you.
  6. The wife may not be given loan by housing finance companies if she is unemployed.
  7. Loans are granted to the owner of the house and a co-applicant is not entitled to concessions of any sort.

If you are looking to invest in a property, make sure you take all these conditions into consideration.

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