Gift to kin is not taxable
QI have purchased a land in January 1985 for `1.5 lakh and now its approximate value is `5 crore. Now I am 70 years old and would like to gift it equally to my wife and two sons and retain one portion for me through proper registration.
I would like to know the tax implications for me as well as my wife and sons, when they receive the gift and when they sell it in due course. If they sell it immediately, what will be the implication? Is there any restriction with regards to the time of transfer deed for the calculation of capital gains? What are the methods to invest the amount after the sale of the land? BHANU PRAKASH
Hyderabad
If the gift is given to a relative specified under Section 56(2)(vii), the same is not taxable under the Income-Tax Act. However, the clubbing provisions will apply in case of transfer of any asset directly or indirectly to spouse, minor children or son’s wife by an individual otherwise than for adequate consideration, then any income arising on the said property will be taxable in the hands of the transferor.
Section 49(1) provides that if the capital asset became the property of the assessee by any of the specified modes referred to therein such as gift or will, succession, inheritance etc., the cost of acquisition of the asset will be deemed to be the cost for which the “previous owner of the property” acquired it, as increased by the cost of any improvement of the asset incurred or borne by the “previous owner of the property” or the assessee, as the case may be.
However, if the cost for which the previous owner acquired the property cannot be ascertained, the fair market value on the date on which the capital asset became the property of the previous owner will be taken as cost of acquisition. If the said previous owner acquired the asset before April 1, 2001, the assessee will have the option of substituting the fair market value as on April 1, 2001 in place of original cost.
Incidentally, for determining whether the capital asset is long-term or short-term, the period for which such previous owner held the asset will also be added to the period for which the assessee held it.
The tax liability on the Long-Term Capital Gain (LTCG) can be avoided if it is utilised towards the purchase of a residential house under Section 54F within a period of one year before or two years after the date of transfer/sale of original asset (the property sold by you) or towards the construction of a residential house within a period of three years after the date of transfer/ sale of the original asset. Further, the assessee on the date of transfer (sale) should not own more than one residential house other than the residential house proposed to be purchased/constructed.
If the amount of the capital gain is not appropriated or utilised for acquisition of the new asset (new residential house) before the due date of furnishing the return of income, it should be deposited in an account with any specified bank or institution in accordance with the Capital Gains Accounts Scheme, 1988 framed by the Central government in this regard.
The other option of avoiding/ reducing the capital gain tax liability is by investing the LTCG in capital gain bonds specified under Section 54EC subject to a ceiling of `50 lakh provided investment is made within six months from the date of sale of the asset.