A very common dilemma that NRIs face while buying property in India – whether to buy on own name or on parents’ name. Today, I will write on this issue – reasons why NRIs prefer registering properties on parents’ name, possible legal and succession related implications and finally my view.
Common reasons NRI buy property on parents’ name
Below are some of the common reasons I could think from my experience of working with NRI clients looking to buy property in India:
#1: Escape Indian tax on rental and capital gains income w.r.t. property:
Some NRI think that the best way to escape tax on rental and capital gains income in India is to buy the flat in the name of the parent, given the fact that parents (especially mother) may have no income and may fall in the lowest tax bracket.
Also read: NRI Tax Implication w.r.t. Immovable Property Transaction in India
#2: Escape tax on income in country of residence:
Many NRIs (especially based in jurisdictions like USA which tax an individual’s worldwide income) think that it is better to buy property in parents’ name, to avoid paying tax in USA on such income. This has become much more serious after India signed intergovernmental agreement with USA on FATCA in 2015 & signed CRS agreements with other countries to allow two way exchange of tax information.
This is pure tax evasion. As far as I know, as of date, though real estate is not considered a “reportable account” and these transactions are not reported by India under FATCA/CRS however even if were, I would not be in favour of this approach.
Also read: CRS & FATCA: Overview and Implications for USA based NRI
#3: To escape the TDS provisions at the time of sale of property
Legal provision on deduction of TDS for any payment to NRI is covered u/s 195 of ITA and it says – if NRI sells property, the buyer will deduct TDS @ 20.60% (I’m assuming capital gain is long term). In case a “resident” sells the property, the TDS rate is a flat 1%.
Now, some NRIs also buy property in parent’s name (who are residents) with an intention to escape the TDS provisions at the time of sale. So, NRI would think that at the time of sale, rather than blocking the sale consideration till he files tax return and claims refund, a better idea would be to sell in resident father’s name so that this unnecessary complication can be avoided.
Also read: TDS Deposit and Return Filing Procedures in Property Transactions
#4: Funds contributed by parent as well:
This can be considered a genuine reason. Generally when NRI buy property in India and fall short of some amount, the parents also chip in with their savings. In such a case, it is totally justified that the property is purchased in joint name and in the ratio of money contribution.
#5: To buy agricultural land in India:
It is a well known fact that an NRI cannot purchase agricultural land in India. And if he does, he is violating FEMA provisions which call for penalty. In some cases, NRI try to circumvent these rules by purchasing agricultural land in name of parent. After some years, the parent sells the land and gives back money to NRI.
Also read: FEMA Implications on acquisition of property in India
#6: Parent is a co-applicant to the loan:
Many a times, it happens that NRI makes father as a co-applicant for the loan to increase the eligibility. In such a case, the bank may insist that father should also be a joint owner in the property.
#7: To make it easier for parents to conduct transaction without requiring NRI’s physical presence in India:
This is another genuine reason for NRI to purchase property in parents’ name. The point of view of an NRI is this – buying the property is only half work done. It will have to be put on rent to a fresh tenant every couple of years, and then there is maintenance, renovation and repair work etc. In such case, the work may get stuck of NRI cannot make time from his schedule and return to India. So, isn’t it better to buy it in parent’s name itself so that they can do the paperwork and stuff, without requiring son to come back to India?
Though this is a valid reason, the negatives (as we read in “implications” section below) outweigh the benefits. As regards maintenance, NRI can always give a Special Power of Attorney (SPOA) to the parent specifying in detail the various tasks that his father can do in his absence, w.r.t. the property. I will cover SPOA (and how NRI can create one on his own) shortly in a separate post.
Understanding possible implications of NRI buying property in parents’ name
Now, let us understand the POSSIBLE implications in a property purchase transaction where NRI has contributed the money but flat is bought and registered solely in parent’s name.
#1: Tax implications:
As per Rule 114B of Income Tax Act (ITA), PAN of all buyers need to be quoted in the sale deed for purpose of registration. As per Rule 114E of ITA, the Sub-Registrar is required, to furnish details of the transaction (if it exceeds INR 30 lacs) to the ITD as part of Statement of “Specified Financial Transaction”.
Now, basis this transaction, if the tax assessment of the parent is opened up viz. a scrutiny assessment, there is a good chance that the Income Tax Department (ITD) may ask the parent to provide the source of funds for the purchase, given that the purchase amount is clearly disproportionate with the income disclosed by parent in tax return.
If proper source information is not provided, ITD may tax the full investment in hands of the resident father as “unexplained investment” u/s 69 of the Income Tax Act. And if it is submitted that the funds actually belong to the NRI son, rental income and capital gains if any, can be taxed in hands of that NRI as per rates given in Section 115BBE of the ITA along with a possible penalty u/s 271AAC for under-reporting of income.
Also read:
New Section 115BBE and 271AAC of Income Tax Act – Important points
Gift by NRI to Resident: Also be aware of Section 68 of ITA
Bear in mind that a “genuine” gift of money to parents who in turn buy a property in their own name will NOT neither attract clubbing provisions u/s 64 of the Act nor attract the unexplained investments provision u/s 69 of the Act. Also, this “gift” will be totally tax free in the hands of the parent as gifts received by a relative is tax exempt in India.
The issue/problem will arise when the real nature of the transaction is NOT gift and the hidden understanding is that it is the NRI only who is investing and just routing it in name of parent – in such a case, the ITD may question the transaction and treat the income assessable in hands of NRI and not his parent. Plus, it can slap NRI with penalty w.r.t. concealment of income. There are also prosecution provisions u/s 276D however they are rarely used and in exceptional circumstances.
#2: FEMA implications:
NRI buying agricultural property in parents name and re-transferring to own name after his return to India is a clear cut circumvention and violation of FEMA regulations.
Penalty for violation of FEMA regulations is three times amount involved where it is quantifiable. If you are already in a situation where you’ve made a violation of this rule, you can apply to RBI for compounding and regularize the transaction by paying a small fee- I’ve written a detailed post on read more here: How Resident/NRIs can resolve FEMA contravention
Your question may be this: How will RBI find out? Now either RBI can either find out through its own (possibility of this is less) OR if ITD comes to know of it in course of an assessment, it is fully within its powers u/s 138 of ITA to disclose this violation to RBI.
#3: Benami Prohibition Act implications:
This, according to me, can possibly be THE most serious implication – as you may be aware, in November 2016, Government has substantially amended the Benami Act by adding 72 new sections, converting an erstwhile toothless Act into a powerful anti black money weapon.
As per the provisions of Benami Act (read a detailed post here: Benami Prohibition Act: An Analysis), any property jointly held with parents is allowed and is not covered in the definition of “benami property” – however, any property bought solely in parents name WILL fall in this definition. Now, if this be the implication, penalties are draconian – both the owner (son) and benamidaar (parent) can face jail penalty + fine equal to 25% of property + confiscation of asset i.e. property.
Now, the opinion is divided on whether the benami provisions will get triggered even whether the source of income is known or it will be triggered in all such cases – in my view, it can be triggered in all such cases, even where source of funds is known, primarily because language of the Act is very clear on this. However, it remains to be seen how the Government goes ahead and implements these provisions – read a recent news report in ET
If you are already facing an issue where you’ve invested in a property solely in parents’ name, you should take professional opinion to rectify this irregularity. One option I can think of is to add yourself as a joint owner in the property –this can be done by your father gifting a certain share say 80% by way of a registered gift deed – this will involve stamp duty and registration fee though – also check out a helpful article in ET Last option that can be considered is the parent selling off the property and transferring post tax proceeds back to the child.
#4: Succession Issues/family disputes:
This is also a big risk and a tricky issue, which not many families are willing to talk about openly – when you buy property in parents name due to whatever reason, relations are cordial however, will it remain the same forever? It may, it may not….
If later on, there is a dispute, or after NRI’s death, terms between his wife and parents are not good, there can be serious disputes on the property – the parent may decide against transferring their share back to wife’s name, or there are other persons (e.g. siblings) which lay a claim on their share on the property, and it can be very very messy.
As per the Hindu Succession Act, share of parent in the property will devolve, in absence of a will, equally to all his legal heirs, which include NRI son’s mother and all siblings – Situation becomes really complicated where 100% of money was contributed by NRI son – in that case, just because parent has been mentioned as a 50% owner of property, will NRI be able to access only 50% or full 100% – this issue will then cause the matter to be taken to the court – and there are good number of judgments where courts have ignored the money contribution and upheld the right of siblings in the property.
Also, in case of such property where there is an existing dispute between co-owners, the property substantially loses its marketability and may have to be sold at a highly reduced price (distress sale).
Right way to genuinely buy property in parents’ name
Below are some pointers on how to conduct the property purchase transaction in parents favour to be on the right side of law at all times:
General points
- NRI should take family members, especially wife, into confidence before proceeding with such a transaction. It is a big investment, and if your wife is not comfortable for whatever reason, do not proceed – buy in own name only.
- Have a clear understanding within the entire family (including siblings) as to what will happen to the property in case of your death or in case of any dispute with parents. However, this does not guarantee that there will be no dispute on the property.
Specific points – If it is a genuine gift transaction and property is purchased by parent in their own name from gift money
- Gift a sum of money from your NRE/NRO account directly to your parents account.
- Sign a gift deed – get it notarized – no need to register it
- Request parent to consider drawing up/amending the will to allow for bequeathing the rights in the property. Do not insist that you should be named as a beneficiary in the will, let it be their own decision.
- Do not receive any credit/flow back in later years by way of a reverse gift of property, money etc. – in that case, the gift transaction can be challenged by ITD in a tax assessment. If you wish to receive back your contribution after some time, then understand that it is not a gift and it is a loan – instead of a gift deed, sign a loan agreement – note that such an agreement needs to comply to FEMA regulations – read here:
FEMA Implications on NRI Gift Transactions: A Scenario-wise Analysis
FEMA Implications on NRI Loan Transactions: A Scenario-wise Analysis
Specific points – If buying property jointly with parent
- In the sale deed, specify the exact share as per the money contribution
- Request parent to consider drawing up/amending the will to allow for bequeathing the rights in the property. NRI should also update his own will as regard his share in the property.
- Any rental income or capital gains from property should be disclosed in respective shares in tax return of NRI son and resident father respectively.
- If at a later date, parent wants to relinquish share in property, it can be done via a registered relinquishment deed.
Specific points: How to settle family dispute on joint property
- Bring all family members on the table
- Engage a good lawyer to peacefully negotiate
- Draw out a family arrangement
- Get the family arrangement registered
My advice to NRIs:
Property is a BIG investment. Source of funds should flow in such a way that there is a clear and transparent trail evident from entries in bank accounts. My firm view is that NRI should buy property in his own name only. He should physically come to India and register it personally before his own eyes. I don’t suggest POA for buying because it adds another layer of complexity to the transaction and at a later stage while selling the property, some prospective buyers hesitate to purchase a property being sold through POA. After purchase, a POA can be given to parent for specific work of collecting rent, executing leave and license etc. Joint ownership of property with parents can be a source to a lot of complications at later stage and owing property in own name reduces chances of tax litigation, eliminates trigger of Benami provisions and chances of disagreements/ family disputes/ succession issues. In case NRI wants to gift some money to parents for maintenance, he can do it so through a gift deed and parents can use it in whichever way they like.
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