A Mumbai flat owner reportedly paid no tax on around ₹17 lakh of annual rental income by structuring the property as a genuinely jointly owned asset with family members. Since each co-owner had a defined share in the property, the rental income was split among them and taxed individually. As each person’s share remained below the taxable threshold, no tax liability arose.
Here’s a look at how rental income splitting works and the rules taxpayers must follow to ensure it remains legitimate tax planning.
Splitting rental income legally
If you co-own a property with a spouse or family member, you can divide the rental income among the co-owners, which reduces each owner’s tax liability. Both co-owners can claim deductions separately, further optimising tax savings.
“However, it can be considered legitimate tax planning if the property is legally registered in the names of multiple co-owners with clearly defined ownership shares, and each co-owner has either contributed to the purchase consideration or acquired their share through a valid and registered transfer, such as a gift deed,” says Abhishek Soni, CEO and co-founder, Tax2win.
Rental income should be reported by each co-owner in proportion to their ownership share. It’s essential to ensure that the income tax department has clear documentation of the property’s ownership structure to avoid future tax issues.
“Splitting rental income among family members is considered legitimate tax planning when it reflects a genuine economic partnership. This means each co-owner would have contributed to the property’s purchase from their own independent funds or through a joint home loan they both service,” says Ritika Nayyar, Partner, Singhania & Co.
However, if a property is transferred to a spouse without adequate consideration, the clubbing provisions under Section 64 may apply, and the rental income may be taxed in the hands of the transferor.
“Proper documentation, such as the registered sale deed, gift deed, and rental agreement, should clearly establish the ownership structure to avoid future tax disputes,” says Soni.
One needs to understand that the arrangement can be considered tax avoidance if it relies only on paper ownership where one person funds the property but adds a nonworking spouse or minor child to the deed solely to shift income.
“Legitimate tax planning for splitting rental income centres on the concept of beneficial ownership rather than just a name on a title deed,” says Nayyar.
Joint ownership needs clear records
“Taxpayers should maintain proper comprehensive documentation to corroborate real co-ownership and the flow of rent to respective co-owners and reflect the underlying commercial non-tax reasons for the co-ownership,” says Amit Gupta, Partner at Saraf and Partners.
The overall arrangements should reflect the co-ownership structure and avoid triggering deeming provisions under the Income Tax Act. Title documents should clearly define each co-owner’s share, and funding contributions should correspond with those respective shares.
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“Further, all correspondence and agreements with tenants should reference every co-owner, while tax withholding and related documentation should also reflect the joint ownership and shared responsibility for property obligations,” says Gupta.
Tax scrutiny on rental splitting
In certain cases, rental income is diverted to family members without corresponding legal ownership or enforceable rights in the property. For instance, rental income may be reported on the tax returns of family members who are not legal co-owners of the property, which may invite scrutiny from tax authorities. Similarly, situations arise in which a property is ‘gifted’ to family members only on paper, without executing a registered gift deed or updating property ownership records, thereby raising doubts about the transfer’s genuineness.
Adding family members as co-owners without proper documentation or a clear ownership transfer, creating ownership shortly before the property is rented out, or allocating ownership shares primarily to family members in lower tax brackets are a few other red flags. In such situations, tax authorities often examine whether the arrangement reflects the true substance of ownership or is merely a formality intended to reduce tax liability.
Also Read: Gift deed vs Will: Here’s what you should know before deciding to transfer property to family
These issues are also frequently linked to cases where taxpayers incorrectly claim House Rent Allowance (HRA) exemptions. This typically occurs when the corresponding rental income is either not reported under the property owner’s PAN or is reported inaccurately. Such inconsistencies are rapidly identified by the Income Tax Department’s data-matching systems, which may trigger notices to taxpayers seeking clarification and reconciliation of the reported information.
Anagh Pal is a personal finance expert who writes on real estate, tax, insurance, mutual funds and other topics
