This comprehensive guide provides valuable insights into the legal and tax aspects of gifting property. Whether it’s movable or immovable property, understanding the regulations surrounding gift deeds, tax exemptions, capital gains, stamp duty, and registration requirements is crucial to avoid any legal complications and ensure compliance with tax laws.
Transfer of Property through Gift Deed
Any movable property may be transferred through a gift deed, as described by Section 122 of the Transfer of Property Act, 1882 (“TOP Act”). Immovable property as gifts must be made in writing through a gift deed as they constitute property transfers. The individual offering the gift is referred to as the “donor,” while the one receiving it is referred to as the “donee.” The gift must be given and received within the lifetimes of both the “donor” and the “donee” to be considered genuine.
Cancelling a Gift Deed: Circumstances and Revocation Clause
A gift cannot be withdrawn unless the contractual parties have agreed in advance that it can be done in the event of a specific incident. A gift deed may be canceled by the donor in certain circumstances, according to Section 126 of the TOP Act. To prevent hiccups, it is frequently advisable to include a revocation clause in a gift deed.
Taxation of Gifts: Definition, Exemptions, Threshold, and Beneficial Classification
“Gift as per Income Tax Act, 1961 (‘IT Act’) means property, both –
- Immovable property: Land or building or both (it does not include agricultural land in rural areas); and
- Movable property: Shares, securities, jewelry, archaeological collection, drawing, painting, any work of art, bullion, vehicles, etc.
And any money obtained without proper consideration or for insufficient consideration, including cash, checks, draughts, etc.”
Gifts received by an individual or Hindu undivided family from any blood relatives, as inheritance, as a marriage gift, or in contemplation of death are not taxable under Section 56(2)(vii) of the IT Act. In other cases, if the total amount of gifts received in a year exceeds INR 50,000/-, it becomes taxable under the heading “Income from other sources” and at standard slab rates.
As long as the total value of all gifts received throughout a year does not exceed INR 50,000/-, a person is completely exempt from paying income tax on those presents. When the total value of all gifts surpasses INR 50,000/-, the total amount of gifts received becomes taxable and is not exempted at that point. However, presents between close relatives also receive beneficial classification under the IT Act. As a result, the recipient is completely and unconditionally excluded from taxation upon receiving any asset, whether movable or immovable, as a gift from certain specified relatives. The list of close relations comprises the person’s parents, spouse, siblings, spouse’s siblings, lineal ascendants, and spouse’s descendants.
Tax Treatment of Capital Assets Received as Gifts
If the gift is in the form of capital assets in the recipient’s possession, it would be taxable. Any presents in the form of stock, raw materials, or consumables that the receiver can use in the course of operating his or her business will not be regarded as capital assets and therefore will not be subject to taxation.
Non-Taxable Gifts: Circumstances and Exclusions
Gifts are not taxable in the hands of the recipient in the following circumstances, regardless of their monetary value:
|
If the Gift is Received – |
From close relatives mentioned hereinabove; |
| On occasion of the marriage; | |
| Under will/by way of inheritance; | |
| In contemplation of death of the payer; | |
| From local authority; and | |
| Any trust or institution described in Section 10(23C) of the IT Act, any trust or institution registered under Section 12AA of the IT Act, as well as a fund, foundation, university, other educational institution, other medical institution, hospitals, or other trust or institution. |
If immovable property is received as a gift from a relative, it will first be subject to tax when it is subsequently sold. The price paid for the immovable property by any prior owner will be considered the cost for income tax purposes. Depending on whether the total holding period and the previous owner’s who had paid for it exceed 36 months, the gains will either be considered short-term or long-term.
The profit accrued on the sale of such immovable property will be considered short-term and added to ordinary income, taxed at the appropriate slab rate, if the holding period as calculated above is shorter than 36 months. However, if it is invested in a residential property or capital gains bonds issued by the Rural Electrification Corporation (REC) or National Highway Authority of India (NHAI), or both, if the holding period is longer than 36 months, it will receive the benefit of indexation on the cost of the immovable property as well as the option to claim exemption from payment of 20% long-term capital gains tax.
A gift deed must be registered with the sub-registrar office under Section 17 of the Registration Act, 1908, much like a sale deed, with the exception that no money is exchanged in the transfer of the property. According to Section 123 of the TOP Act, failure to do so will result in the contract being void.
In comparison to a typical transfer of property to a third party, a lower stamp duty is applied when it is given as a gift to a close relative. The stamp duty on gift deeds varies from state to state, even though a small registration cost must be paid to register the gift deed. If property is given to blood relatives like parents, spouses, or siblings, the Maharashtra government levies a modest INR 200+1% metropolitan cess on the market value of the property.
In the case of immovable property, the stamp duty value must be taken into account while calculating gift tax. However, the cost of stamp duty may be higher for a number of reasons, one of which may be the length of time between the agreement setting the consideration and the date of registration. Therefore, if the following criteria are met, the stamp duty value as of the date of the agreement determining the consideration must be taken into account for gift tax purposes:
- The dates of such agreement and registration are not the same, and
- On or before the date of the agreement for transfer, consideration is paid in full or in part by an account payee check or bank draft or by using an electronic mode of transfer through a bank account.
In addition, the tax officer is required to refer the valuation to a valuation officer, call for records, give the taxpayer an opportunity to be heard, and pass an order in writing of the value at which he has arrived in cases where the taxpayer has questioned or disputed the stamp duty value adopted by the stamp duty valuation authority in accordance with Section 50C of the IT Act. A lesser stamp duty value or value determined by the valuation officer must be adopted for gift tax purposes.
Presents in India typically come under the scrutiny of the tax agency because of significant tax planning involving gifts, especially if the value is large. Therefore, it may be wise to keep records to prove the validity of the donation received and a sufficient source of funding with the donor to support the gift.
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Disclaimer: The information provided in this article is for general informational purposes only. While an author tries to keep the information up-to-date and correct, there are no representations or warranties, express or implied, about the completeness, accuracy, reliability, suitability, or availability of the information. Any views or interpretations described in this article are the author’s personal thoughts and do not constitute legal or other professional advice. You may discover there are other views or interpretations to accomplish the similar end result.
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Sir, can the stamp duty paid on the execution of gift deed be claimed as deduction in the computation of capital gain on sale of that immovable property??
Kindly guide.
Regards
Suraj