Have a real estate gift? Factor in tax rules

A gift in common parlance means something given voluntarily without payment in return (i.e. for ‘Nil’ consideration), while the meaning as per the Transfer of Property Act, 1882 is transfer of certain existing moveable or immoveable property made voluntarily and without consideration, by one person to another. Generally, a gift of property is documented in writing by a gift deed.

In this article, income tax implications on gift of property (held as an investment i.e. a “capital asset”) have been outlined. A gift is commonly understood as a transfer of an asset from one person to another. However, ‘gift’ is a disregarded ‘transfer’ for the purposes of computing income under the head ‘capital gains’. In other words, there should not be any income tax payable or loss allowable for the donor on account of the gift transaction. This is on the presumption that the genuineness of the gift transaction is not under question.

Now, coming to the income tax implications for the recipient on account of the gift transaction. In cases where an individual taxpayer receives an immovable property without consideration from another individual, then income tax implications need to be evaluated in the hands of such recipient, being an individual. In this connection, following is the taxability mechanism in the hands of the recipient, being an individual:

# Immovable property received “without consideration”: If the stamp duty value exceeds Rs 50,000, the stamp duty value of such property would be taxable as income.

The above aspect is explained by way of an illustration.

The income on account of the gift transaction (as outlined above) is taxable in the hands of the recipient, being an individual under the head ‘income from other sources’ and taxable at normal tax rates (as per applicable income slabs). Following are the exceptions in respect of taxability of gift transactions:

# Gift received from relatives (refer chart below for definition of relatives) or
# Gift received on the occasion of the wedding of the recipient or
# Gift received in contemplation of death of the donor.

In case of the above exceptions, income is not considered taxable in the hands of the recipient, being an individual and this is explained below by way of an illustration.

The following additional aspects are of relevance in case of gift transactions and should be noted:

# In cases where real estate become the property of the taxpayer on account of receipt of gift and that transfer is disregarded for the purposes of computing ‘capital gains’, the cost of such real estate for the donor would be considered as the cost of acquisition in the hands of the recipient of such gift. This is explained below by way of an illustration and outlines a case in which gift transaction was considered not taxable in the hands of the recipient.

# In cases where the value of the real estate (i.e. stamp duty value) is taxed in the hands of the recipient, the amount taxed would be regarded as cost of acquisition for such recipient. This is explained below by way of an illustration and outlines a case in which gift transaction was considered taxable in the hands of the recipient.

The above aspects would be relevant when the gifted property is sold by the recipient (i.e. person receiving the gift).In addition to income tax, one needs to consider other implications such as legal, stamp duty (based on respective state legislation) in respect of property gift transactions. Given that property transactions are high value and complex on account of various factors, it is advisable for the taxpayer to seek professional guidance from income tax experts while entering into such transactions.

The author is director, Deloitte Haskins & Sells LLP