Fractional Ownership of Real Estate and Income Tax: How Co-Ownership Platforms Fall Through the Cracks of Section 54 and 54F

Introduction

Fractional ownership of real estate has moved from a niche arrangement between family members and business partners to a fully commercialised, technology-enabled investment class in India. Platforms such as hBits, stREITwise, and YOURS allow retail investors to co-own high-value commercial or residential properties by contributing as little as ₹10 lakh. The proposition is simple — pooled capital, shared rental income, and eventual capital appreciation on exit. What nobody told most of these investors, however, is that the Indian income tax framework was not written with them in mind. Specifically, the capital gains exemptions under Section 54 and Section 54F of the Income Tax Act, 1961 [1] — two of the most frequently invoked reliefs in property transactions — rest on a phrase that is deceptively simple and yet deeply contested: whether the investor “owns” a residential house. The result is a grey zone where a person who holds a fractional share of a commercial building through a co-ownership platform may simultaneously (a) be disqualified from the Section 54F exemption because they already “own” residential property somewhere else, and (b) be ineligible for the exemption even when reinvesting, because the reinvested asset is not a residential house in the traditional sense. This article unpacks how that tension has played out in litigation, what the current regulatory framework looks like after SEBI’s March 2024 amendments, and what tax treatment fractional investors can realistically expect today.

Sections 54 and 54F: The Statutory Text

Section 54 of the Income Tax Act provides an exemption from long-term capital gains tax to an individual or Hindu Undivided Family (HUF) on the transfer of a residential house, provided the net consideration is reinvested in one residential house in India within one year before or two years after the date of transfer, or construction is completed within three years of transfer. The Finance Act 2023 inserted a proviso capping the exemption at ₹10 crore in net consideration for deposit purposes under the Capital Gains Account Scheme (CGAS), applicable from Assessment Year 2024–25 onwards.

Section 54F, introduced in 1983, is broader in scope but narrower in its conditions. It permits an individual or HUF to claim exemption on long-term capital gains arising from the sale of any capital asset other than a residential house — shares, gold, commercial property, plots — provided the net consideration is invested in one residential house in India. The same reinvestment timelines apply: purchase within one year before or two years after the transfer date, or construction within three years. The Finance Act 2023 applied the same ₹10 crore cap to CGAS deposits under Section 54F as well. Critically, the proviso to Section 54F(1) prohibits the exemption if, on the date of transfer, the assessee owns more than one residential house other than the new one being acquired

[2]. The distinction between the two sections matters enormously to fractional investors: a person who exits a fractional stake in a commercial property is selling a capital asset other than a residential house, so the operative provision is Section 54F — with all its restrictive conditions — not Section 54.

The Fractional Ownership Problem: What Makes It Distinct

A traditional sale of residential property involves a single seller parting with a self-contained unit. A fractional platform, by contrast, pools multiple investors into a Special Purpose Vehicle (SPV) or a co-ownership agreement. Investors hold equity shares in the SPV (often a private limited company), or they hold undivided fractional shares in the property directly. When an investor exits — whether by selling their SPV shares or their undivided interest — the nature of the asset they are selling is relevant to which capital gains provision applies.

Where the investor holds equity shares in an SPV (which in turn owns the property), the asset being transferred is shares of a company, not real estate. Gains on these shares would be taxed under normal capital gains provisions applicable to equity, not under the residential property exemption route. Section 54F could theoretically apply because shares are not a residential house, but the investor would then need to park the gains in a new residential house — something entirely disconnected from the underlying commercial property investment. Where the investor holds an undivided fractional share in the property itself, the analysis is messier. The asset transferred is real property, and the question of whether the investor already “owns” a residential house — which would trigger the disqualifying proviso of Section 54F — has been fiercely litigated.

Does Fractional Ownership Mean ‘Owning’ a Residential House? The Judicial Conflict

For investors holding undivided fractional ownership shares in property, the situation is more complex. The transferred asset is real property, and the question of whether the investor already “owns” a residential house — potentially triggering the disqualifying proviso under Section 54F — has been the subject of extensive litigation. The central interpretive battlefield in this area is the word “owns” in the proviso to Section 54F. Two irreconcilable schools of thought have developed across High Courts and the Income Tax Appellate Tribunal (ITAT), with no Supreme Court resolution yet on the specific Section 54F question.

The Restrictive View: Every Fractional Share Counts

The Karnataka High Court in CIT v. M.J. Siwani, [2014] 366 ITR 356 (Karnataka), took a firm position that even a fractional ownership or joint share in a residential house amounts to “ownership” for the purposes of Section 54F. In that case, the assessees and their brothers each held a 50% undivided fractional ownership interest in a property in Bangalore. When they sold their undivided land interest and claimed the Section 54F exemption on reinvestment, the Karnataka High Court denied it, holding that the restrictive proviso applied because they “owned” a residential house jointly. The Supreme Court’s dismissal of the Special Leave Petition (SLP) in this case at [3] — cited as [2015] 53 taxmann.com 318 (SC) — was subsequently misread by Assessing Officers as an endorsement of the Karnataka position. However, as the Mumbai ITAT authoritatively clarified in Zainul Abedin Ghaswala, the dismissal of an SLP under Article 136 does not merge with the impugned order or constitute a declaration of law under Article 141 of the Constitution, relying on the Supreme Court’s own ruling in Kunhayammed v. State of Kerala [2000] 113 Taxman 470 (SC).

This restrictive approach draws authority from the Supreme Court’s much older decision in Seth Banarsi Dass Gupta v. CIT, [1987] 166 ITR 783 (SC), where the Court held that a fractional owner of a factory could not claim depreciation under Section 10(2)(vi) of the Income Tax Act, 1922, because the benefit required the assessee to be the owner of the property. The Court observed that ownership must be vested fully in one single name and not as joint or fractional owner. It was because of this ruling that Parliament subsequently amended Section 32 by inserting the words “wholly or partly” with effect from 1 April 1997, to expressly include part-ownership for depreciation claims. The argument in the Revenue’s favour is that since Parliament chose to amend Section 32 but never similarly amended Section 54F’s proviso, the legislative intent is clear: fractional ownership disqualifies the exemption.

The Liberal View: Fractional Share Is Not Full Ownership

A materially different interpretation has been accepted by the Madras High Court, multiple ITAT benches, and the Rajasthan High Court. The Madras High Court in Dr. P.K. Vasanthi Rangarajan v. CIT, [2012] 209 Taxman 628, dealt with an assessee who held a 50% share in a residential-cum-clinic property jointly with her husband. When she sold a different long-term capital asset and claimed Section 54F exemption, the revenue denied it on the ground that she already “owned” a residential house. The High Court held that the joint ownership of the property did not constitute ownership of a residential house in the sense contemplated by Section 54F, because she could not be said to be the exclusive owner of the house. The Court read the proviso strictly — a co-owner who cannot exclusively possess or deal with the property independently does not satisfy the “owns” condition for disqualification purposes [4].

The Karnataka High Court itself — departing from M.J. Siwani on a different point — took a more liberal direction in DIT (Intl.) v. Mrs. Jennifer Bhide, [2011] 203 Taxman 208 (Karnataka), holding that where an assessee had paid the entire consideration for a new house, the mere fact that another person’s name appeared as co-owner in the sale deed could not deny the assessee the full Section 54F benefit. What mattered was the economic reality of investment, not the formal co-ownership label [5].

The Mumbai ITAT cemented the liberal approach in Zainul Abedin Ghaswala v. CIT(A), NFAC, ITA No. 545/MUM/2023, decided on 22 May 2023, [2023] 152 taxmann.com 662 (Mum-Trib) [6]. The assessee had inherited land with five family members, and each member had constructed and occupied their own flat independently. The Assessing Officer, relying on the Karnataka High Court’s M.J. Siwani view and the SLP dismissal, held that since the assessee was a co-owner of six residential properties, Section 54F did not apply. The Mumbai ITAT bench of Kavitha Rajagopal (Judicial Member) and Om Prakash Kant (Accountant Member) held that “unless and until there are materials to show that the assessee is the exclusive owner of the residential property, the harshness of the proviso cannot be applied to the facts.” The Tribunal distinguished the SLP dismissal in M.J. Siwani from a declaration of law and followed instead the Madras High Court’s favourable view. This was further confirmed in Kusum Sahgal v. ACIT, AY 2015–16, Order dated 08.11.2023 (ITAT Delhi) [7], where the Delhi bench held that a 1/4th undivided share in a family house does not amount to owning a full residential house for purposes of the Section 54F disqualifying proviso.

On the interpretive methodology, the Supreme Court’s settled principle in CIT v. Vegetable Products Ltd., [1973] 88 ITR 192 (SC) — that where two reasonable interpretations of a taxing provision are possible, the one favourable to the assessee must be adopted — has consistently been relied upon by courts and tribunals taking the liberal approach. However, the Supreme Court’s constitution bench in Commissioner of Customs v. Dilip Kumar and Company, (2018) 95 taxmann.com 327 (SC), has injected some tension: that bench held that where tax exemptions are concerned (as opposed to liability), the benefit of doubt should go to the Revenue. Both principles are now live in Section 54F litigation.

How Co-Ownership Platforms Are Regulated: The SEBI SM REIT Framework

The regulatory architecture for fractional real estate investing in India changed meaningfully on 8 March 2024, when SEBI notified the SEBI (Real Estate Investment Trusts) (Amendment) Regulations, 2024 [8], introducing a new Chapter VIB into the existing SEBI (Real Estate Investment Trusts) Regulations, 2014. The amendment created a dedicated framework for Small and Medium Real Estate Investment Trusts (SM REITs).

Under the new framework, any entity that pools ₹50 crore or more from a minimum of 200 investors to acquire and manage real estate assets must register with SEBI as an SM REIT. The minimum unit price is set at ₹10 lakh per investor, which is deliberately lower than the pre-existing fractional platform norm of around ₹25 lakh, with the aim of widening retail participation. The definition of REIT itself was amended to expressly bring fractional ownership investments within its scope: REIT is now defined as a person that pools ₹50 crore or more for the purpose of issuing units to a minimum of 200 investors in order to acquire and manage real estate assets. Existing unregistered fractional ownership platforms (FOPs) were given a migration pathway to bring their structures into the SM REIT fold by submitting a migration plan along with a registration application

[9]. Each scheme of an SM REIT must hold real estate assets with a minimum value of ₹50 crore, and the investment manager must hold at least 5% of the scheme units, aligning managerial incentives with investor interests.

SEBI also mandated that SM REIT units be listed on a recognised stock exchange, directly addressing the liquidity gap that had plagued unregulated FOPs. Under the old structure, an investor in a fractional platform who wanted to exit had to find a willing buyer independently — often back through the platform itself at its own discretion. Listing creates a secondary market. The minimum public holding for each scheme is 25% of outstanding units.

The SM REIT framework also introduced disclosure requirements matching those for conventional REITs: regular disclosures on property valuation, rental income, management fees, and expenses must be published. Investor grievances can now be filed through SEBI SCORES, the regulator’s online platform, rather than through informal platform channels. As of March 2024, fractional ownership platforms were estimated to manage more than ₹4,000 crore in assets under management. SEBI’s intervention essentially acknowledged that FOPs had grown large enough to require the same structural governance and transparency that conventional REITs are subject to.

Tax Treatment of SM REIT Units and the Unresolved Gap

The migration of fractional platforms to the SM REIT structure could unlock tax benefits available to SEBI-registered REITs under the existing tax framework. Dividend distributions from REITs are taxed in the hands of investors, and capital gains on listed REIT units attract concessional long-term capital gains rates after the prescribed holding period. However, the specific tax consequences for each investor’s individual position — particularly the interaction with Sections 54 and 54F when the investor sells SM REIT units and tries to claim a capital gains exemption — have not been addressed by the Income Tax Act or CBDT circulars as of the time of writing.

When an investor sells SM REIT units, the asset being sold is securities (units of a listed trust), not real estate. Section 54F would technically apply because units are not a residential house. But if the investor wants to reinvest the gains into a residential house to claim Section 54F, the proviso immediately becomes an issue: does the investor’s fractional interest in the underlying real estate held through the SM REIT count as “owning” a residential house? If the SM REIT holds commercial properties, this question may not arise. But emerging structures that include residential assets in their portfolios — luxury second homes, holiday villas, or serviced residences — could squarely trigger the disqualification proviso. Given the judicial divergence described earlier, this is currently answered only by whichever High Court has jurisdiction over the assessee, and even then conflicting positions exist.

The CBDT has not issued any specific guidance reconciling the Section 54F conditions with fractional or SM REIT ownership. CBDT Circular No. 1/2024 reiterated only that the primary objective of Sections 54 and 54F is to mitigate the acute shortage of housing and give impetus to house-building activity, but did not address fractional investment structures. The legislative silence on part-ownership — in sharp contrast to Parliament’s express amendment of Section 32 to include “wholly or partly” — continues to generate the interpretive dispute that courts have been unable to resolve definitively.

Practical Implications for Fractional Investors

For an investor who has sold shares, gold, or any non-residential capital asset and is considering deploying the gains into a fractional ownership platform, the current legal position is genuinely uncertain. If the platform is structured as an SPV in which the investor holds equity shares, the capital gain on exit will be on shares — eligible for Section 54F if reinvested in a residential house. But the investor’s existing fractional positions through other platforms or co-owned family properties may trigger the disqualifying proviso, depending on how the Assessing Officer interprets “owns.”

If the platform is structured as a direct undivided share in property, the investor’s exit triggers capital gains on real property. Section 54F applies if the property was not residential. The reinvestment conditions and the disqualifying proviso both become operative. If the investor already holds a residential house — even jointly with a spouse — the Revenue may deny the exemption on the strength of M.J. Siwani. If the investor is in a Madras High Court jurisdiction or can demonstrate that their co-ownership is not exclusive ownership, the exemption should stand.

The three-year lock-in rule under Section 54F is also relevant: if the investor sells the newly purchased residential house within three years of acquiring it to claim the exemption, the exemption is withdrawn and the gains become taxable in the year of sale. This is a practical hazard for investors who might pivot between real estate positions within a three-year window.

For investors who do not reinvest immediately, the Capital Gains Account Scheme (CGAS) offers a holding mechanism: gains can be parked in a designated account before the income tax return due date, with the funds then drawn down for reinvestment within the statutory period. However, under the Finance Act 2023 amendments, only gains up to ₹10 crore qualify for CGAS deposit in the context of Section 54F. Gains above that threshold are taxable outright.

Conclusion

The fractional real estate market in India is evolving faster than the income tax laws that govern it. SEBI’s 2024 SM REIT framework addresses market structure, investor protection, and transparency with a more sophisticated approach. In contrast, the tax framework does not account for fractional ownership complexities. Sections 54 and 54F were drafted for a scenario where an individual owned or sold a single residential property, not for a world where multiple investors hold undivided fractional ownership in a managed commercial asset through technology-enabled platforms. The interpretation of the word “owns” has been litigated across at least five High Courts and dozens of Income Tax Appellate Tribunal (ITAT) benches, with no Supreme Court resolution yet on the Section 54F question. The Madras and Rajasthan High Courts have adopted an assessee-friendly approach, Karnataka has taken a Revenue-friendly view, and the Supreme Court’s SLP dismissal in M.J. Siwani has been carefully distinguished by subsequent tribunals as not constituting a binding declaration of law.

Until Parliament amends Section 54F to address fractional part-ownership expressly — the way it amended Section 32 after Seth Banarasi Dass Gupta — or until the Supreme Court settles the point definitively, fractional investors and their advisors must navigate a patchwork of conflicting precedents. The safest approach remains relying on one’s own jurisdiction’s favorable High Court precedent, maintaining documentary evidence that co-ownership does not constitute exclusive ownership, and treating the Section 54F exemption as contestable — not guaranteed — whenever fractional ownership interests are involved.