Readers' Corner: Taxation

Kuldip Kumar, partner and leader, personal tax, PwC India, answers your questions

My father-in-law had purchased a vacant land lot around 50 years earlier and constructed a house on it immediately, given on rent. This is his self-acquired property. He has three daughters. Now, he is considering selling the property and dividing the proceeds equally among the daughters. Or to gift the property to one of the daughters, who in turn will pay equal sums to her two sisters. In this regard, please clarify :

 

a) On sale of the property, what is the income tax liability on my father-in-law? How to avoid payment of any tax?

 

Any gain made on sale of house by your father-in-law would be taxable in his hands as capital gains. Since he is  holding the house for more than 50 years, the resultant gain shall be long-term and taxed  at 20 per cent (plus applicable education cess). He can save tax by reinvesting the gains in another house or investing in capital gain bonds, etc. Capital gain would be computed by deducting the indexed cost of acquisition and improvement from the sale consideration received. Any expenditure incurred  in relation to sale of house such as brokerage paid, etc, is also deductible. Indexed cost of acquisition/improvement is the increased value of cost of acquisition/improvement after adjusting for the inflation effect since your father-in-law bought the property. Your father-in-law would have the option to replace the cost of acquisition with the market value of house as  on April 1, 1981, where the same is more beneficial. This year’s budget has proposed to advance the date of replacing the market value of property to April 1, 2001, where property is sold after March 31, 2017.

 

If the proceeds are distributed equally to three daughters, what is the tax liability on the daughters?

 

There is no inheritance tax levy or gift tax in India. In case the property is sold by your father-in-law and the proceeds are distributed equally to the daughters, there would be no tax in the hands of his daughters. Although Section 56 of Income Tax Act, 1961 (Act) provides for the taxation of any money received exceeding Rs 50,000 in the hands of recipients, gifts from close relatives are not taxable. 

 

If the property is given as gift to one daughter, what is the tax liability on her? Is  any tax payable on the other daughters who get money from her ?

 

Where the property is given to one daughter, there would be no tax on such gift of property by the father to his daughter. The cost of acquisition of  house in the hands of daughter will be nil. However, where a daughter sells the house, for the purpose of calculating capital gains, she will have an option to substitute the cost of acquisition with the cost of acquisition to the previous owner (her father) and the holding period of father would also be counted as period of holding the house in the hands of daughter. The capital gain would be computed in the similar manner as explained above in the hands of father-in-law. Where the sales proceeds is gifted by the daughter to her two sisters, the same would not be taxable in the hands of her sisters being gifts from close relative. You will note that from tax stand point of view, the liability in the hands of father or daughter remains the given two scenarios. If your father-in-law considers gifting of the house to his daughters, say, in equal shares, then the same would not be taxable in the hands of daughter being the gift from close relative. Further, later when the house is sold by the daughters, the same would be taxable in their hands for the portion of their share in the house (1/3rd each). For the purposes of calculating the capital gains, daughters would be able to substitute the cost of acquisition as was the cost of acquisition in the hands of father. The capital gains would be calculated in the similar way as explained above. So each daughter would be taxable for her share in the property.

 The views expressed are the expert’s own. Send your queries to yourmoney@bsmail.in