All about benami property in India

[ecis2016.org] What is a ‘benami’ property and what are the consequences of owning one? We explain

A ‘benami’ property is one, where a property is purchased in the name of a person, who is not the real beneficiary. The person, in whose name the property is purchased, is known as a ‘benamidar’.

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‘Benami’ literally translates to ‘without any name’. In the case of real estate transactions, a benami property is one, where the person actually paying money to buy a property, does not buy it in his/her own name. In such a transaction, the person who finances the purchase of the property is its real owner and not the person under whose name it has been purchased. A benami property is bought and held for the direct or indirect benefit of the purchaser of the property. As such, assets other than real estate can also be declared as benami, including gold, financial securities, legal documents and so on.

Taxes and penalties on benami properties

Benami properties attract penalties, not only under the benami laws, but also under the income tax laws. The ‘Benami Transactions (Prohibition) Act’ was passed in 1988, to eliminate corruption and black money. However, it was never implemented, as the necessary rules and regulations were not put in place. Now, with the passing of the ‘Benami Transactions (Prohibitions) Amendment Act, 2016, an effective law has been put in place, to deal with benami properties.

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[ecis2016.org] Taxes and penalties on benami properties

Making an investment in another person’s name has implications under the benami laws, as well as the income tax laws, for the benamidar and also the beneficial owner (the individual who provides the funds to buy the property in another person’s name).

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Income tax implications for the beneficial owner (buyer)

According to Section 69 of the Income Tax Act, if any investment is made by a person, which is not recorded in the account books maintained by him, then, the value of such investments shall be deemed as income of the person who makes the investment and the same shall be taxed in the year in which such investments are made.

The source of funds for such investments can be explained, only if the purchase has been accounted for, in the books of accounts maintained by him. So, making an investment in a benami property has severe consequences. A benami property can be confiscated by the government, without giving any compensation for the same, in addition to the liability for penalty and prosecution, under the benami transaction laws. There is also the prospect of tax liability under the income tax laws, as well as penalty and prosecution.

Taxes on benami properties

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Benami investments are taxed at a flat rate of 60 per cent. The person will also have to pay a surcharge of 25 per cent and education cess of three per cent, on the tax amount. The tax liability, after taking into account all the taxes and surcharge, will come to 83.25 per cent of the value of the investment.

Income tax implications for the benamidar

As the benamidar is the legal owner of the property, they will have to pay tax on the income that arises from such property. If the legal owner has more than one house property, notional rent will be applicable as per the income tax laws and the legal owner has to offer income on such properties, even if there is no income from such properties. Moreover, the benamidar can be held liable, for concealment of facts before the income tax authorities and for misstatement and therefore, can be liable for penalty under the Income Tax Act.

Does purchase of property under the wife’s name constitute benami property?

If a husband has brought a property through valid funds, then, buying it under his wife’s name does not automatically make it a benami property. The Delhi High Court has noted: “The existence of the properties in the name of the wife will fall as an exception to the prohibited benami transaction, as it is legally permissible for a person to purchase an immovable property in the name of his spouse from his known sources.”

Other exceptions to the benami property law

• If a member of a Hindu Undivided Family (HUF) holds the property for his benefit or for other members of his family and the funds are paid through non-circuitous sources of income, this does not constitute a benami transaction.
• Transactions by a trustee, executor, partner, director of a company or a depository or as a participant agent of a depository under the Depositories Act, 1996, is also not a benami transaction.
• A brother or sister or lineal ascendant or descendant, where the names of the brother or sister or lineal ascendant or descendant and the individual appear as joint-owners in any document, and the consideration for such property has been provided or paid out of the known sources of the individual, then, it is not considered benami.
• If the central government notifies any other exceptions, the same is to be noted.

FAQs

(With additional inputs from Sneha Sharon Mammen)

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