Sometimes, people borrow money from relatives to finance the purchase of a house. While doing so, one must keep in mind the provisions of the Income Tax Act.

It should be ensured that the name of the family member (in whose name the property is to be bought) is clearly mentioned in the agreement to sell or sale deed. The legal ownership is based on the name in which the property is finally registered. If the property is purchased jointly then the percentage of each co-owner should also be clearly mentioned in the agreement.

Further, it should also be ensured that the person in whose name the property is being purchased should have sufficient funds. This is essential to avoid problems from the Income Tax Department. It is advisable to avoid taking a gift from the spouse. Moreover, a wife should not receive a gift of money to buy property from the husband, father-in-law or mother-in-law.

A few years ago gift tax was abolished. So there is no gift tax on a gift of either a house or funds for the purchase of a house. However, income earned from such gifts is taxed in a different mode. One must keep in mind the provisions relating to clubbing of income before deciding on funding options within the family.

One should keep in mind the recent amendments in the Income Tax Act. Accordingly, under Section 2(24) of the Income Tax Act, the definition of income has been expanded to include any sum received as gift in excess of Rs. 25000 from unrelated persons. As per the amendment, any sum of money in excess of this limit, received by a person in cash or by Cheque or draft or any other mode of credit would be charged to tax, if it is received otherwise than by way of consideration for goods or services. The clause is effective for amounts received after September 1, 2004. Accordingly gifts received by an individual or HUF on/after September 1, 2004 from persons other than specified relatives will be considered as income under section 2(24) (xiii) of the Act.

Under section 64 of the Income Tax Act, clubbing provisions have been incorporated. The section is intended to prevent evasion of tax by diversion of income by camouflaging the transactions and disguising them as transfers, which is not the case in the real sense of the word.

As per the provisions of Section 64 of the Income Tax Act in computing the total income of any individual, all such incomes as arises directly or indirectly from assets transferred without adequate consideration will be included.

Where an asset is transferred by an individual, directly or indirectly, without adequate consideration, to a person or to an association of persons fro the immediate or deferred

Where an asset is transferred by an individual, directly or indirectly, without adequate consideration, to a person or to an association of persons for the immediate or deferred benefit of children or wife, then the income arising from the transferred assets is included in the total income of the transferor to the extent of such benefit

Similarly, where an asset is transferred by an individual, directly or indirectly without adequate consideration, to a person or to an association of persons for the immediate or deferred benefit of his/her spouse, then the income arising from the transferred assets is included in the total income of the transferor to the extent of such benefit.

In case an individual makes a cash gift to his wife, who in turn purchases a house with the gifted money then the individual will not be treated as fictional owner of the property. Taxable income of wife from the property is includible in the income of the individual in case she uses the house for her own residential purposes.

If a person transfers a house without consideration to his/her spouse or to his/her minor child, then the transferor is deemed to be the owner of the house and taxed accordingly. If a person transfers a house without consideration to his son’s wife or child, then the transferor will not be deemed to be the owner of the house. Income earned from the house will be included in the income of the transferor. The transferee will be treated as the owner of the house and the income computed in her hands is included in the income of the transferor.