Buying property in a family member's name? Here’s when it can get you into trouble

A family relationship by itself does not make such a transaction illegal. The law provides specific exceptions for certain family arrangements, but these come with conditions around the source of funds, ownership and who ultimately benefits from the property.

In an interaction with Upstox News, Pranshu G, Partner at Ashok Pranshu & Co., explains where families can run into trouble and what they should keep in mind.

When can a property transaction become benami?

A transaction can fall within the definition of a benami transaction when a property is held in one person’s name, the consideration is paid by another person and the property is intended for the benefit of the person providing the money.

According to Pranshu, families sometimes assume that using a relative’s name automatically makes an arrangement safe.

"Families commonly enter the danger zone by purchasing property in the names of siblings, friends, employees or other nominees," he said.

Another situation can arise when a person who is legally ineligible to purchase property in a particular area uses another person’s name to acquire it.

"Another recurring example is where a buyer uses a local person’s name to acquire property in tribal or hill areas where the actual purchaser is legally ineligible to buy property," Pranshu said.

Authorities can examine several factors, including the source of the money, possession and control of the property, the financial capacity of the parties and their conduct.

What if the property is bought in a spouse's or child's name?

Buying a property in the name of a spouse or child is not automatically a benami transaction. There is a statutory exception where the consideration is paid from the purchaser’s known sources.

The law also provides for certain joint purchases involving a brother, sister, lineal ascendant, such as a parent, or lineal descendant, such as a child. However, specific conditions have to be met, including the person providing the consideration being named as a joint owner and the money coming from known sources.

Certain HUF arrangements can also qualify when the required conditions are satisfied and the consideration comes from known HUF sources.

"The relationship alone is insufficient," Pranshu added. "The precise statutory conditions and traceable funding must be satisfied."

In other words, being a spouse, parent, child or sibling does not by itself settle the question. The structure of the transaction and the money trail matter.

What happens if a property is flagged as benami?

The consequences can be significant.

"The Initiating Officer can issue a notice and provisionally attach the property. The matter can then be referred to the Adjudicating Authority, which determines whether the property is benami," said Pranshu G, Partner.

"If the property is declared benami, confiscation may follow, subject to the statutory appeal process. In appropriate cases, prosecution can also follow and may involve imprisonment and a fine.

Benami proceedings are separate from proceedings under the Black Money Act, which deals with undisclosed foreign income and assets.

Depending on the circumstances, unexplained domestic funding can also result in tax additions and penalties under the Income-tax Act, apart from any benami proceedings," added Pranshu.

What documents should families maintain?

For families entering into such arrangements, maintaining a clear record from the beginning can be important.

Documents should include the registered sale deed, bank statements showing the complete flow of funds and income-tax returns demonstrating the financial capacity of the person providing the money. Records showing who possesses and benefits from the property can also be relevant.

Depending on the nature of the arrangement, families may also consider documents such as a gift deed, loan agreement, declaration of beneficial interest, co-ownership agreement, HUF records or a family settlement.

"Cash contributions and post-facto explanations should be avoided," according to Pranshu.

The documentation should ideally be created when the transaction takes place, rather than after a dispute or investigation has started.

"Documentation must establish both the source of consideration and the intended beneficial ownership from inception," he explained.

Recent cases also show why documentation can matter

In Smt. Meera Pandey v. Union of India, [2024] 164 taxmann.com 188 (Allahabad); [2024] 465 ITR 366 (Allahabad), the property stood in the mother-in-law’s name, while the Department alleged that the house being constructed on it was actually held for the benefit of her son-in-law.

According to Pranshu, the allegation arose principally from a contractor’s statement, which was not supported by documents or a disclosed basis of knowledge.

The case, he says, illustrates how a relative’s involvement in construction or property management can attract scrutiny when ownership, funding and decision-making have not been independently documented.

Authorities are also examining assets held through employees or people who may not appear to have the financial capacity to acquire them.

For families, the practical lesson is fairly simple: the property documents, source of money and actual ownership should be consistent with each other.

"In benami cases, the real test is whether the title, source of funds and beneficial enjoyment of the property tell the same story," Pranshu said. "A family relationship by itself is not a shield, unless the transaction falls within a specific statutory exception, such as a qualifying purchase in the name of a spouse or child."

Before buying property in a family member’s name, therefore, it is worth looking beyond the relationship and making sure the funding, ownership and documentation are clear from the start.