What are the tax implications on gifts?

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I’m a Hindu male and own a 3BHK joint property with my father where he stays. My father owns another 1BHK property in his name where I stay. We would like to sell the 1BHK property to own a bigger house. In the end, my father and I wish to own separate properties in individual names.What are the tax implications if I get a gift of 100% stake in the 1BHK house from my father and give him in return a gift of my joint 50% stake in the 3BHK house? What are the capital gains implications if after becoming 100% owner of the 1BHK house, I sell the property to upgrade to a bigger flat? All properties are in Mumbai.

—Name withheld on request

 

We have assumed that the 1BHK property owned by your father is a residential house property, and the same was acquired after 1 April 2001 and it has been held by him for more than 24 months.

As the gift would be given by a specified relative, the transaction of gift itself will not give rise to any tax implications in either your or your father’s hands. Accordingly, when the 100% stake in the 1BHK property is gifted by your father to you and when 50% stake in the 3BHK property is gifted by you to your father, there shall not be any tax implications in your or your father’s hands. Please note that the onus of proving that the said transactions are independent and in the nature of gift rests with the taxpayer.

Generally, gift of an immovable property can be effected by a registered gift deed along with payment of applicable stamp duty.

Subsequently, when you sell the 1BHK property, as it will be held for more than 24 months prior to such sale, the said property will qualify as a long-term capital asset. The resultant gain/loss arising out of sale of said property would be taxable as long-term capital gains/ loss (LTCG/L) in your hands. LTCG/L is calculated as the difference between net sale consideration and the indexed cost of acquisition (ICOA) and improvement.

Since the house property has been transferred by gift, the cost of acquisition for you will be the cost to the original owner. The indexed cost of acquisition of the asset in your case would be calculated as cost of acquisition/cost inflation index (CII) of year of acquisition * CII of year of sale. (CII prescribed for FY 2021-22 is 317). Further, if the actual sale consideration is lower than the stamp duty value by more than 10%, the stamp duty value would be regarded as the deemed sale consideration, for the purpose of calculating such LTCG/L. The tax is payable by you at 20% on the resulting LTCG. A rollover exemption on the resulting LTCG is available towards the following investments, subject to the prescribed conditions and timelines:

• Under Section 54 of the Act, by investing the LTCG in a new residential house;

• Under Section 54EC of the Act, by investing the LTCG in specified notified bonds; and

• Under Section 54GB of the Act, by investing net consideration in equity shares of an eligible startup.

Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India.

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