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Gift of immovable property, even from a relative, may have stamp duty implications

LiveMint logoLiveMint 04-09-2017 Parizad Sirwalla

My mother bought a plot in Bangalore in 1995. We are trying to sell the land for Rs30 lakh now. My mother is about 60 years old. The buyer will transfer the funds through RTGS to our bank account. Do we need to pay income tax if my mother divides the property into three equal parts: between herself, me and my sister? Also please advise how we can reduce the tax outgo in this transaction. 

—Deepu

Your mother intends to gift a part of the property to you and your sister prior to the proposed sale. 

Normally, where an immovable property is received by an individual during a financial year (FY) without consideration and the stamp duty value of such property exceeds Rs50,000, the recipient would need to declare the value of the property received as “income from other sources” and pay income tax on it. However, gifts received from a relative (including mother) would not be similarly taxed. 

Therefore, such a gift of property would not be taxable as income in your or your sibling’s hands. It would be advisable for your mother to document the gift in a legal gift deed and place it in her records. However, gift of an immovable property may have stamp duty implications that, which need to be evaluated.

Subsequent sale of the property by your family will then result in tax implications for each of you (your mother, you and your sibling) in the ratio of your ownership. 

As your mother has held this property since 1995, the part of the property received by you as a gift from her will also be deemed to be held by you and your siblings since 1995. The gain or loss, from the sale to each of you, would then be taxable as long-term capital gain (LTCG) or loss (LTCL). 

LTCG is computed as the difference between net sale proceeds and the indexed cost of acquisition of the land. Indexation refers to adjusting the cost of the asset based on the cost inflation index (CII) published by the income-tax office. The LTCG arising from the sale of an asset on or after 1 April 2017, should be computed with reference to the indexation of costs between 1 April 2001 and the year of sale.

Since this property was first purchased in 1995 by your mother, each of you may opt to use the fair market value (FMV) of the property as on 1 April 2001 as the cost of the property, to compute the taxable capital gains. You should therefore obtain a valuation of this asset as on 1 April 2001 and use either such FMV as on 1 April 2001 or the actual purchase cost, at your discretion. 

The LTCG can be claimed as exempt from tax by reinvesting it in a new residential property in India or in specified bonds . The balance LTCG, if any, shall be taxable at 20.6% (including education cess). Proportionate share of LTCG will be taxable in the hands of your mother, sister and yourself in ratio of ownership post gifting by your mother.

If your mother first sells the property, then the total LTCG will be taxable in her hands. Subsequent gifting of funds from your mother to you and your siblings would not have any tax implications for you, your sibling and your mother.

The EMI for my under-construction house started from 1 April 2017, but possession is due in September 2018. Can I claim exemption for my home loan for FY 17-18?

—Snehalata Deshmukh

The tax deductions permitted in respect of either repayment of principal or interest in respect of a home loan can be availed beginning from the FY in which the house acquired is completely constructed. 

Any interest paid prior to the FY in which construction or acquisition is completed, can be claimed in five equal instalments, commencing from the FY in which the property is completely constructed.

Therefore, interest paid by you till 31 March 2018 can be claimed in five equal instalments starting from FY2018-19 (assuming construction is completed and possession handed over in FY2018-19). This deduction is in addition to the interest payable for each such FY beginning FY2018-19. The total deduction for interest will be subject to the additional caps depending on whether the property is self-occupied or let-out for rent, in each FY.

Parizad Sirwalla is partner (tax), KPMG.

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