DOES GIFT DEED IN PROPERTY ATTARCT CAPITAL GAINS
Zeeba Aga
(Querist) 06 November 2009
This query is : Resolved
RESIDENTIAL PROPERTY WAS PURCHASED MORE THAN 3 YEARS AGO AND WOULD JUST ATTRACT LONG TERM CAPITAL GAIN TAX IF NOT INVESTED IN ANOTHER RESIDENTIAL PROPERTY WITHIN THE TIME SPECIFIED AS PER LAW.
THE PROPERTY WAS ON 2 NAMES AND JUST RECENTLY THIS YEAR THE ONE OF THE PROPERTY HOLDERS TRANSFERRED HIS/HER 50% SHARE AS GIFT. NOW JUST 9 MONTHS HAS PASSED AFTER THE GIFT DEED WAS REGISTERED.
IN CASE WE SELL THIS PROPERTY NOW AND PURCHASE OR NOT PURCHASE A RESIDENTIAL PROPERTY, WILL IT ATTRACT A CAPITAL GAIN TAX, AND IF YES THEN ON THE ENTIRE PROPERTY AMOUNT OR JUST THE 50% GIFT DEED TRANSFERRED AMOUNT,OR NOT AT ALL.
IF YES THEN SHORT OR LONG TERM AND ON WHICH SHARE.
REGARDS
A V Vishal
(Expert) 07 November 2009
What is the relation of the donor and donee, under the provisions of the amended tax laws The Centre has changed the definition of income under the Income-Tax law to ward off litigation on a Budget proposal on taxation of property passed on as gifts. The gifting route was hitherto used to escape the tax net, but this Budget sought to plug this loophole by bringing to tax, at the hands of the recipients, all property received as gifts. The change in the definition of income would settle doubts raised in certain quarters about the Income-Tax Department's legal authority to tax as income from other sources the value of immovable or movable property received for an inadequate consideration or as gifts, say tax experts. The latest move to cover value of property (received as gifts) under the definition of income was part of the amendments moved by the Finance Minister, Mr Pranab Mukherjee, to the Finance Bill, 2009 in the Lok Sabha on Monday. It was contended by some tax experts that such transactions were in the nature of capital receipts and that it could be challenged in courts that there was no income element to them and, therefore, should not be taxed.
SPECIFICATIONS
However, by bringing in a specific change in definition of income to cover such situations, the Centre has made sure that the room for legal challenge was minimised. Henceforth, property received as gifts from non-relatives will be treated as income and be subjected to Income-Tax accordingly. Thus, if a person in the 30 per cent tax bracket receives an immovable property from a non-relative without paying any consideration (gift) and the stamp value of the property is say Rs 1 crore, then the recipient may be required to pay as much as Rs 33 lakh as Income-Tax.
CLARITY ON TRANSFERS
Another amendment brought about on Monday related to taxation of subsequent transfer or sale of the property received as gifts by the recipient. There was an issue on what would be the cost of acquisition on the property received as gift when subsequently sold. The cost of acquisition is important for computation of capital gain. The Centre has now brought clarity on this issue by spelling out the methodology for arriving at cost of acquisition. It has now been specified that the amount treated as value of the property (either for stamp duty purposes or fair market value) under Section 56(2) would be taken as the cost of acquisition. By specifying the cost of acquisition, there will be certainty with regard to computation of capital gain. In the absence of clear guidelines on the methodology for computation of cost of acquisition, a reasonable doubt would have been created with regard to chargeability of capital gains tax for such subsequent transfers.
To illustrate ABOVE, let us consider an immovable property (with fair market value of Rs 1 crore) received as a gift by an individual. According to the Budget proposal, Rs 1 crore would be added to the total income of as income from other sources for tax purposes. Now when the same property is subsequently sold by the recepient for say Rs 2 crore, the cost of acquisition for the recepient would be Rs 1 crore and not the cost incurred by the initial donor of the immovable property. Therefore, only Rs 1 crore would be subjected to capital gains tax.
The budget proposal has been subsequently passed without any modifications.
Zeeba Aga
(Querist) 07 November 2009
Hello Vishal,
Thank you so much for your reply in length. But being a layman I would like one advise from you. As asked by you that what was the relationship of the donor and the donee.
Sir the donor was the daughter in law and the donee was the mother in law.
Kindly guide as per this relationship.
Thanks and regards.
A V Vishal
(Expert) 07 November 2009
Zeeba
In your case the particular provision discussed by me at lenght doesn't apply, however, if the property in question is held for a period of less than 36 months before it is disposed off it shall be treated as short term capital gain. Here there are two angles, the first 50% is treated as long term and the remaining 50% which is a gift will be treated as short term. In your best interest it is advisable to seek services of a CA locally before any further action so that you may plan and save on taxes rather than paying excess tax amount.
adv. rajeev ( rajoo )
(Expert) 07 November 2009
If u sell the entire property capital gain tax wll be applicable.
Ist 50% short term @nd 50% long term
Vineet
(Expert) 07 November 2009
Zeeba
As from the facts understood, the property has been held for more than three years. During this period one of the co-owners i.e. mother in law has gifted her 50% share to the other co-owner i.e. daughter in law.
1. Upon sale of this property the entire gain will be treated as Long term capital gain as the property has been held for more than three years by the owner including the period of holding by the donor. The cost of acquisition shall be the original cost of purchase in the hands of both original owners.
2. There are various options available under income tax act to claim exemption of long term capital gains tax. You can get benfit of one of them subjct to fulfilment of conditions therein.
3. However, if you choose to pay capital gains tax on the whole or part of the long term capital gains tax arising out of this transaction, please note that 50% of such income shall be taxable in the hand of Mother-in-law due to specific provisions of section 64(1)(vi) of the Act.
Vineet
(Expert) 07 November 2009
Section 64(10(vi) of the Act provides for clubbing of income arising out of property transferred to Son's wife without adequate consideration in the hands of original owner. In this case the property has been transferred to son's wife without any consideration, hence the entire capital gains on gifted part of property shall be clubbed in the hands of mother in law and taxed accordingly.
A V Vishal
(Expert) 08 November 2009
Vineet S.64 does not apply in the instant case.
Vineet
(Expert) 08 November 2009
Why, it is a clear case of clubbing of income as asset has been transferred to daughter in law without any consideration. any income arising therefrom attracts provisions of that section.
Zeeba Aga
(Querist) 08 November 2009
Dear Sirs,
Please excuse me but the property share has been transferred from the daughter in law to the mother in law and not vice versa as being mentioned in the above sugestions. Would that make a difference to the law or topic. Kindly advise.
Regards
Vineet
(Expert) 08 November 2009
yes, Zeeba
Please excuse me as I read it otherwise.
In the case of gift from daughter in law to mother in law the clubbing provision will not be invoked. Only long term capital gain tax @20% plus cess @3% shall be applicable in the hands of mother in law for the entire property.
She can save this tax also by investing the sale consideration in a new residential house or specified capital gains saving instruments.
