Buying property in the name of a spouse, parent or child is a common practice among Indian families. Some do it to secure their children's future, while others prefer to register family assets in the name of a wife or elderly parent.
However, a seemingly straightforward family arrangement can become a complicated tax and legal matter if the source of money and actual ownership are unclear.
Under India's income tax and benami property laws, the person paying for a property and the person whose name appears on the sale deed need not always be the same. But the arrangement must comply with legal requirements.
The crucial distinction is between a legitimate family transaction and an arrangement intended to conceal the real owner or the source of funds.
Consider someone purchasing a house worth ₹1 crore and registering it in their mother's name. If the mother has no income or savings sufficient to explain the purchase, the Income Tax Department may examine how the property was financed.
That does not automatically make the transaction illegal. The money could have been provided legitimately as a gift or loan.
However, authorities may seek bank statements, income tax returns, payment records and evidence showing the source of funds. They may also examine who controls the property, collects rent and enjoys its financial benefits.
Transactions involving substantial cash payments, unexplained deposits or money routed through unrelated accounts could attract closer scrutiny.
Indian law provides specific exceptions for certain family transactions. Under the Prohibition of Benami Property Transactions Act, 1988, property purchased in the name of a spouse or child using money from the purchaser's known sources is generally excluded from the definition of a benami transaction.
However, this protection does not extend automatically to every relative. For example, property held jointly with a brother, sister or lineal ascendant or descendant may qualify for a statutory exception if the required conditions are met, including payment from known sources and the purchaser's inclusion as a joint owner.
The legal treatment therefore depends on the relationship, how ownership is recorded and where the money originated.
One way to finance a relative's property purchase is through a genuine gift. Under Section 56(2)(x) of the Income-tax Act, 1961, gifts received from specified relatives, including spouses, parents, children and siblings, are generally exempt from income tax.
Nevertheless, the transfer should be supported by appropriate documentation. Bank records and a written gift declaration can help establish its legitimacy.
If the money is intended as a loan rather than a gift, a written agreement specifying the loan amount, repayment terms and other conditions is advisable.
Simply transferring money into a relative's account without explaining its purpose could create difficulties when the transaction is examined.
The consequences can be serious if authorities establish that a transaction violates benami property laws. Property identified as benami may face provisional attachment and eventual confiscation, subject to statutory procedures.
In cases involving benami transactions undertaken to defeat legal provisions, avoid statutory dues or evade creditors, the law also provides for criminal prosecution and substantial fines.
Separately, unexplained investments may be treated as taxable income under applicable provisions of income tax law, potentially resulting in additional taxes, interest and penalties.
Not every inadequately documented family transaction becomes a benami offence. The circumstances and statutory exceptions determine the outcome.
Registering a property in a spouse's name does not necessarily shift the associated income tax liability. Under the income-clubbing provisions, income generated from assets transferred to a spouse without adequate consideration may be included in the transferring spouse's taxable income.
Similar rules can apply to income arising from assets transferred to minor children, subject to exceptions. Therefore, families purchasing investment properties should consider not only ownership and registration but also how future rental income will be taxed.
Property buyers should preserve the sale deed, payment receipts, bank statements, income records and any gift or loan agreements relating to the purchase.
If two family members jointly own a property, the ownership documents should accurately reflect their arrangement. Buyers should also ensure that any applicable stamp duty and registration requirements are satisfied.
For NRIs purchasing property for relatives in Kerala or elsewhere in India, compliance with FEMA and RBI regulations is another important consideration.
The safest approach is to establish a clear connection between the source of funds, the registered owner and the intended ownership arrangement before completing the transaction.
Buying property for a family member is not inherently suspicious. But failing to document who paid for it, why the money was transferred and who actually owns the asset can turn a family investment into a costly legal dispute.
