Indian real estate laws can be complex. If you are a new homebuyer, navigating the complex web of real estate transactions can also be a nightmare. We asked our legal expert to shed some light on a particularly confusing issue in real estate: The question of taxes on benami properties.
What is a benami property?
A benami property is an immovable property, which has either been purchased in one person’s name and paid for by another person or has been purchased under a fictitious or untraceable name. This is usually done to escape taxes. Therefore, the property cannot be said to have a clear title and becomes a benami property.
Isn’t there a law against such practices?
The Benami Transactions (Prohibition) Act, 1988 was never implemented fully and therefore failed to impose any effective restraint on Benami transactions. As a part of the recent drive to curb black money in India, the legislature passed the Benami Transactions (Prohibition) Amendment Act, 2016 and updated the existing law to make it more effective.
What are the penalties under this law?
Section 3 of the Act provides that no one shall enter into any Benami transaction. Under the previous law, punishment of imprisonment up to three years or a fine, or both, was imposed on an offender.
However, for offences committed after the commencement of the 2016 Amendment, the penalties and punishment have been made more severe. As per Section 53 of the Act, if any person enters into a Benami transaction to circumvent the law, avoid payments, statutory or otherwise, such person shall be held to be guilty of the offence of a benami transaction. This provision applies to the benami owner, the beneficial owner and even any person who abets or induces another person to enter into a benami transaction.
The punishment has been increased to rigorous imprisonment for a term of one to seven years and a fine of up to 25% of the market value of the property in question.
Further, where any person provides false or misleading information to any authority under the Act or during any proceeding under the Act, such person also would be awarded with rigorous imprisonment of six months to five years and shall also be liable to pay a fine of up to 10% of the market value of the property.
Besides the above, owning a benami property has many other problems. No suit, claim, or action can be enforced to a benami property. As a result, the beneficial owner or the person whose name the property is held in or even contended to be held in, cannot enforce any of his rights in a court of law concerning such property. The Central Government can also confiscate the benami property.
Penalties under income tax laws
The Income Tax Act, 1960, provides for severe consequences where any income is found to be from unexplained sources.
Section 69 of the Act states that if any investment is made by a person, which is not recorded in the books of accounts maintained by him, then, the value of such investments shall be deemed to be the income of the person who makes such investments. The same shall be taxed in the year in which such investments are made.
The person being investigated is given a chance to explain the nature of the investment, and if he fails to do so, it shall be treated as income. Furthermore, the tax rates applicable to investments from benami property are double the rate of tax on regular income.
Therefore, along with the surcharges and education cess, the tax liability amounts to around 83.25% of the value of the income itself. Another consequence of owning such property is that the benamidar could be held liable for concealment of facts and misstatement.
It’s not really such a murky world out there, is it? Things are changing in Indian real estate. Stay on the safe side of the law always. If in doubt, contact our real estate advisors.
Great Blog, Thanks for sharing with us!