Claiming Long-Term Capital Gains Benefits: Eligibility for Joint Property Ownership

Tax Implications of Jointly Owned Residential Properties in India

Joint ownership of residential property between spouses has become a common practice in India, driven by various factors such as financial planning, ease of succession, access to home loans, and stamp duty benefits available in certain states. However, the tax implications of such arrangements can become complex, especially when the property is sold and only one spouse has funded its purchase.

According to tax experts, the income tax department may contend that the spouse who has funded the entire purchase consideration, serviced the home loan, and borne the economic burden of ownership is the true beneficial owner for income-tax purposes. This means that the entire capital gain from the sale of the property may be taxed in that person's hands under Section 67 of the Income Tax Act, 2025 (corresponding to Section 45 of the Income Tax Act, 1961). Additionally, exemption under Sections 85 or 86 (corresponding to Sections 54 or 54F) may be available only to that spouse.

Exemption for Long-Term Capital Gains (LTCG)

Read also: Correcting Credit Score Errors: A Guide to Ensuring Accurate CIBIL Reports and Optimal Loan Eligibility

Exemption for LTCG on residential property is governed by Section 54 of the Income Tax Act, 1961, now re-enacted as Section 82 of the Income Tax Act, 2025. According to this section, an individual or a Hindu Undivided Family (HUF) can claim exemption from long-term capital gains arising from the sale of a residential house property if the capital gains are utilized for acquiring another residential house property in India within the prescribed time period of two years from the date of sale for a ready-to-move-in house, or three years for self-construction or an under-construction property.

Taxability of Jointly Owned Property

The taxability of jointly owned property at the base level flows from Section 24 of the Income Tax Act, 2025 (formerly Section 26 of the Income Tax Act, 1961). According to this section, the share of each co-owner must be clearly defined for tax purposes. Each co-owner is responsible for declaring their share of the income from the property, whether that income is in the form of rental earnings or capital gains from the sale.

Recent ITAT Ruling

Read also: Missing a Single EMI Payment Can Adversely Impact Credit Profile

In a recent ruling by the Income Tax Appellate Tribunal (ITAT) in Mumbai on April 17, 2025, the tribunal held that LTCG exemption under Section 54 cannot be denied merely because the new property was purchased jointly. In the case of Tejal Kaushal Shah, the wife paid Rs 1.76 crore and her husband paid Rs 55 lakh toward a jointly purchased property worth Rs 2.31 crore. The ITAT ruled in favour of the assessee, holding that Section 54, being a beneficial provision, should not be interpreted rigidly or denied on hyper-technical grounds. Each spouse's exemption was pegged to their actual financial contribution, not an assumed 50-50 split.

Factors Considered by Tax Authorities

Tax authorities typically consider multiple factors while examining such arrangements, including the source of funds, repayment of housing loan EMIs, declared ownership ratio, treatment of rental income, housing loan deductions claimed in earlier years, and consistency in tax filings. Documentary evidence such as bank statements, contribution trails, loan documents, and ownership declarations become important in establishing the taxpayer's position.