Methods of ‘Transfer of Property’ – its ‘Legal’ &‘Tax’ consequences

The Transfer of Property Act, 1882 (TP Act) establishes a uniform and precise legal framework for the act of parties that transfers movable property from one living person to another.

Section 5 of the TP Act provides a definition of ‘Transfer of Property.’ It describes a deed executed by a living person transferring property to one or more other living person, by self, or by other living people in the present or future. Whether incorporated or not, a business, an association, or group of people are considered as living beings.

A transfer is when something is changed hands from one person to another. Any tangible or intangible thing that a person or group of people owns is considered to be property. By giving away rights, interests, ownership, or possession, a property can be transferred from one person to another as long as all or some of the requirements are met.

There are two ways to transfer property: first, through an agreement between the parties; and second, through legal action.

The sale deed is typically the only method of property transfer that the general public is aware of. Despite being inefficient and subject to certain restrictions, this method is the most efficient, well-known, and common because it grants the property’s owner an absolute, unconditional, and unrestricted right to ownership. But if the transfer is to be made between blood relatives, it can be done through a gift deed or relinquishment deed if one of the joint owners is giving up or selling his or her whole interest in the property.

Additionally, if a property owner decides to keep their asset for themselves during their lifetime but pass it on to their family when they pass away, they have the option of executing a last “Will” that will take effect after their passing.

Here are some methods for transferring immovable property:

• Sale Deed: According to Section 54 of the TP Act, a sale is the transfer of ownership in exchange for a price that has been paid in full or in part, or a combination of both. It is the most typical method of real estate transfer.

The Sale Deed must be registered in the office of the sub registrar. Even if the buyer has paid the seller the full sum up front, a Sale Deed that has not been registered does not transfer possession to the buyer. Under the Income Tax, 1961 (‘IT Act’), such transfers are subject to capital gain tax and require the payment of stamp duty and registration fees.

In its budget for 2021–2022, the Maharashtra government promised a 1% reduction in the standard stamp duty rate on real estate transactions if the transfer of residential property or registration of a sale deed is done in women’s names. As a result, women will now pay less stamp duty than men when purchasing a home.

• Exchange Deed: According to Section 118 of the TP Act, an exchange is a transaction in which two people exchange the ownership of one property for the ownership of another, without either of the two properties being limited to money alone. Additionally, two separate sales might be carried out to transfer property between the parties.

The Exchange Deed will be subject to the same stamp duty as a sale of an immovable property. Although, the property with the higher value will be used to determine the stamp duty amount.

According to Section 54 of the IT Act, the exemption may be used in the event of a residential property exchange. The owner who is trading in the smaller flat for a bigger one won’t owe any taxes. Similar to the above, there will be no tax due if one purchases a smaller apartment with a market value roughly equivalent to the indexed long-term capital gains computed on the bigger apartment.

There can never be a tax exemption if a residential property, commercial property, or piece of land is traded for another piece of land or commercial property. One can invest in a residential property under section 54F of the IT Act or in capital gain bonds under section 54EC to claim an exemption on long-term capital gains arising on such an exchange.

• Partition Deed: The transfer by way of partition typically occurs when the Hindu Undivided Family (HUF) Karta wishes to transfer ownership of multiple or bigger possessions (land or otherwise) to other family members. Each member becomes the independent owner of his or her portion of the property upon execution of the partition deed, and they are free to sell, lease, give, etc. their respective assets.

The only problem with this type of transfer is that there will only be one title deed in the original, and different owners won’t be able to keep custody of it. However, it does not invalidate an individual’s ownership claim to a property.

A partition deed must be registered with the sub-registrar of the jurisdiction where the moveable property is located in order to be legally legitimate. To have the partition deed registered, the parties participating in the partition must pay registration and stamp duty fees.

After dividing a property by a partition deed, the recipients are not required by the IT Act to pay any capital gains tax.

• Relinquishment Deed: An irreversible legal document or instrument is used when a legal heir irrevocably relinquishes or releases his or her legal rights in an inherited property for another legal heir, such as their mother, son, daughter, brother, sister, etc.

The relinquishment deed needs to be registered with the sub-registrar in order to be valid legally. Only the portion of the property being given up is subject to stamp duty; the entire worth of the property is not. If the property is transferred by a relinquishment deed for a payment, the transferor will unavoidably incur capital gains under the IT Act, and no tax benefits would follow.

• Gift Deed: A registered gift deed may be used to transfer immovable property in accordance with Section 122 of the TP Act. The transfer of the real estate is done willingly and without payment. The transfer through a gift deed is similarly legally binding and irreversible.

According to section 123 of the TP Act, a gift deed must be registered with the sub-registrar in order for the transfer to be legitimate.

Since there is a stamp duty exemption that varies from state to state, the transfer by way of gift is typically more common when it occurs within blood ties. For instance, in Maharashtra, the stamp duty is INR 200 if the property is a residential or agricultural property and is given to family members of blood relatives without receiving any consideration. Unlike a sale or conveyance deed, a residential or agricultural property can be gifted to blood relatives without being required to pay consideration.

According to the IT Act, capital gains resulting from gifts of property to blood relatives are free from taxation. The income derived from the gifted asset, however, can be taxable.

• Trust Deed: In a trust, the property of the settlor, or creator of the trust, is transferred to the trustee for the benefit of the beneficiary, a second party. Trusts can often be divided into two categories: private trusts and public trusts.

A registered written document, a trust deed, must be used to declare a trust that has immovable property and constituted by a non-testamentary instrument, according to section 5 of the Indian Trusts Act, 1882.

The amount settled or market value of the property transferred under the Trust Deed charges stamp duty, just like on a conveyance. The relevant State stamp legislation, however, will have the final say in whether or not stamp duty is actually levied. The stamp authorities may allow stamp duty exemptions or relaxations in situations where the Trust Deed involves “blood relatives” in accordance with the relevant State stamp legislation.

The provisions of section 56(2)(x) of the IT Act will apply because when a property is resolved via the Trust Deed, it is essentially a gift. Under an “irrevocable” trust, Section 47(iii) of the IT Act exempts the transferor from capital gains tax. Please take note that revocable trusts are not eligible for the exemption provided by section 47(iii) of the IT Act, and any transfers made in such cases would be subject to capital gains tax.

• Will: If a person dies intestate, or without making a will, the property is transferred in accordance with the law of succession. If a person transfers property by means of a last Will, the vesting takes place following the death of the person making the last Will. However, ownership will only pass to the beneficiaries after the passing of the testator or the property’s owner.

The intestate succession laws that apply to Hindus, Sikhs, Buddhists, and Jains are outlined in the Hindu Succession Act, 1956. Muslims are subject to Sharia Law, whereas Christians and other people not covered by the Hindu Succession Act, 1956 or the Sharia Law are subject to the Indian Succession Act, 1925.

Moreover, the IT Act does not apply to any asset that is inherited, whether through a last Will or the laws of succession. Reselling such property acquired through the execution of a last Will, however, will subject the beneficiary to regular capital gains under the IT Act.

A Will is not required to be registered and no stamp duty needs to be paid on the execution of such last Will.

A probate from the High Court is occasionally required to give the last Will a legal status. A probate is a legal procedure that authenticates or verifies the last Will since there is a significant chance that the Will may be contested. It is significant to remember that not all states need wills to go through probate.

“A person’s immovable property typically has a large value, thus the method of transfer should be carefully considered as it might have major legal and tax repercussions.”

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.