Nov 14, 2008

Buying a Benami Property: Know the Legal Implications

Are you planning to purchase a property in the name of any of your relative (except spouse and unmarried daughters) to avoid tax implications or for any other reason? Please don’t, because it is a benami transaction and is illegal. The property can be confiscated by the government and you could be put behind bars. Moreover, in future if something goes wrong, you the beneficial owner cannot file a suit against the benamidar (the ostensible owner) to recover the property from him.

According to Benami Transactions Prohibition Act, 1988, benami transaction is one in which property (both moveable and immoveable) is transferred to one person for a consideration paid or provided by another person. In other words, “Benami transactions” are purchases made in somebody else’s name (ostensible owner/benamidaar), who does not pay and merely lend his/her name, while the real title vests with another person who actually paid for the property (beneficial owner).

Good news is that as of now, the 20 year old act remains only in books and is still to come into operation because the necessary rules for implementing it has not been framed by the government.

The unique features about this act are that it is one of the briefest statues with just 9 sections and further even after 2 decades it is still lies dormant.

But very soon it is going to be a reality because the government is trying to strength the law by completely rewriting and resurrecting the Act with a purpose to clamp down on benami property transactions which are quite rampant in our economy.

Therefore, if you’re contemplating purchase of property in the name of any other person, consider all the legal provisions so that you don’t commit an offence unwittingly.

However, there is a way out. Instead of going for benami transaction, you can transfer the property by way of gift which is perfectly legal. But before making a transfer by way of a gift, remember the following points:

1) In case you gift money to a non-relative, it will be treated as income of the donee (with certain exceptions) under section 56(2)(v) of the Income Tax Act.

2) If you gift property, it won’t be treated as income of the donee (as gifts in kind are exempted), but will be subject to stamp duty and registration charges in case of an immovable property.

3) Finally, the income from the transferred asset will be clubbed in your hands in certain specified cases under section 64 of Income Tax Act.

Also Read: 8 Tax Considerations to Remember before Buying a Home

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