A ‘benami’ property is one that is bought in the name of someone who is not the true beneficiary. A ‘benamidar’ is the person who purchases property in his or her name.

‘Benami’ literally means ‘without a name.’ In the case of real estate transactions, a benami property is one in which the person paying the money does not buy the property in his or her own name. In such a case, the person who finances the purchase of the property is the true owner. Not the person whose name it was purchased in. A benami property is purchased and held for the direct or indirect benefit of the purchaser. As a result, assets other than real estate. Such as gold, financial securities, legal documents, and so on, can also be declared as benami.

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Benami property taxes and penalties

Making an investment in the name of another person has consequences under benami laws as well as income tax laws for both the benamidar and the beneficial owner (the individual who provides the funds to buy the property in the name of another).

1988 and 2016 Benami property laws

To combat corruption and unaccounted money, the ‘Benami Transactions (Prohibition) Act was passed in 1988. It was never implemented, however, because the necessary rules and regulations were not put in place. The ‘Benami Transactions (Prohibitions) Amendment Act, 2016’ was passed in 2016 to put a stop to benami transactions in the country.

However, keep in mind that the new benami property law is only applicable in the future. And the 2016 amendment to the 1988 act cannot apply retroactively to transactions that occurred between September 5, 1988. And October 25, 2016. The Supreme Court of India stated the same in a verdict issued on August 23, 2022.

Income tax consequences for the beneficial owner (buyer)

According to Section 69 of the Income Tax Act, if a person makes an investment that is not recorded in his account books. The value of the investment is considered income of the person who makes the investment and is taxed in the year in which the investment is made.

Only if the purchase has been accounted for in his books of accounts can the source of funds for such investments be explained. As a result, investing in a benami property has serious consequences. Under the benami transaction laws. A benami property can be confiscated by the government without compensation, in addition to the liability for penalty and prosecution. In addition, there is the possibility of tax liability under income tax laws, as well as penalties and prosecution.

Benami property taxes

Benami investments are taxed at a flat 60% rate. On top of that, the individual must pay a 25% surcharge and a 3% education cess on the tax amount. After all taxes and surcharges are deducted, the tax liability will be 83.25 percent of the investment value.

Benamidar income tax implications

Because the benamidar is the legal owner of the property, they must pay tax on the income generated by it. If the legal owner owns more than one house property. Notional rent will apply under income tax laws. And the legal owner must provide income on such properties even if no income is generated. Furthermore, the benamidar may be held liable for concealment of facts before income tax authorities and misstatement. And thus may be subject to a penalty under the Income Tax Act.

Is property purchased in the wife’s name considered benami property?

If a husband purchased a property with legitimate funds. Buying it under his wife’s name does not automatically make it a benami property. “The existence of properties in the name of the wife will fall as an exception to the prohibited benami transaction.” The Delhi High Court stated. “As it is legally permissible for a person to purchase an immovable property in the name of his spouse from his known sources.”

Other benami property law exceptions

• A benami transaction does not occur when a member of a Hindu Undivided Family (HUF) holds the property for his or other members of his family’s benefit and the funds are paid through non-circuitous sources of income.
• Transactions by a trustee, executor, partner, director of a company or a depository, or as a participant agent of a depository under the Depositories Act, 1996, are also not considered benami.
• Where the names of the brother or sister or lineal ascendant or descendant and the individual appear as joint-owners in any document, and the consideration for such property has been provided or paid out of the individual’s known sources, it is not considered benami.
• Any other exceptions announced by the central government must be noted.

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