Benami property taxes and penalties
Benami properties are punishable not only under Benami laws but also under income tax rules. To combat corruption and black money, the ‘Benami Transactions (Prohibition) Act was passed in 1988. However, it was never implemented because the requisite laws and regulations were not put in place. With the passage of the ‘Benami Transactions (Prohibitions) Amendment Act, 2016,’ an effective law to deal with Benami properties has been enacted.
Investing in the name of another person has consequences under Benami rules and income tax laws for both the Benamidar and the beneficial owner (the individual who gives the funds to acquire the property in the name of another).
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 documented in the account books maintained by him, the value of the investment is presumed to be an income of the person who makes the investment and is taxed in the year in which such investments are made.
Only if the acquisition 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 ramifications. Under the Benami transaction laws, the government may confiscate a Benami property without providing any compensation, in addition to the liability for penalty and prosecution. In addition, there is the possibility of tax liability under income tax legislation, as well as penalties and prosecution.
Benami property taxes
Benami investments are taxed at a fixed 60% rate. On top of that, the individual must pay a 25% surcharge and a 3% education cess on the tax amount. After deducting all taxes and surcharges, the tax liability will be 83.25 % of the investment’s value.
The Benamidar’s Income Tax Implications
Because Benamidar is the legal owner of the property, it must pay tax on the income generated by it. Though the legal owner owns more than one dwelling property, notional rent will apply under income tax laws, and the legal owner must provide income on such properties even if there is no income from them. Furthermore, the Benamidar may be held accountable for concealing facts before income tax authorities and misrepresentation and may be subject to a penalty under the Income Tax Act.
Penalty under the Benami Act
The Benami Act provides for the following types of punishment:
1. Benami property confiscation
2. When a Benami transaction is entered into to circumvent the provisions of any legislation, evade payment of statutory dues, or avoid payment to creditors, any person who enters or aids/induces another person to engage in such a transaction faces the following penalties:
3. Imprisonment for 1 to 7 years and a fine of up to 25% of the property’s fair market value
4. If a person who is compelled to disclose information under this Act provides false information, he will face the following penalties:
5. Imprisonment for 6 months to 5 years and a fine of up to 10% of the property’s fair market value.