Any transfer of property under a gift is not considered as a taxable transfer, in the hands of the transferor
My family has four people—my wife, two kids and myself. I have joint properties with my wife. My children are majors and I want them to lead their life by themselves; so I want to separate the properties equally among all 4 family members through a settlement deed. As per HUF laws, can I make settlement deed written through a memorandum of understanding (MoU) without going for registration? Will this settlement deed through MoU attract any capital gains tax? Please advise.
—Name withheld on request
It is assumed that the subject properties are under the joint names of you and your wife and there is no separate HUF entity that is or is proposed to be set-up, where these properties would be settled. Further, the properties or share in properties would be settled amongst your family members by you or your wife, through a gift transaction.
Generally, gift of an immovable property can be effected by a registered MoU or gift deed along with payment of applicable stamp duty, depending upon the state in which the property is situated. However, you should seek a legal opinion on the appropriate documentation and stamp duty implications.
From an income tax perspective, capital gains is triggered only where there is a taxable transfer. Any transfer of property under a gift is not considered as a taxable transfer, in the hands of the transferor. Hence, gift of property by you or your wife to your major children will not trigger capital gains taxation in your or your wife’s hands. Further, as the gift received in the instant case would be from specified relatives, i.e., father or mother, the same would also not have any tax implications in the hands of the recipient (i.e. your major children). Separately, income arising (if any) from the gifted property post the transfer, would be taxed directly in the hands of major children.
Also, please note that in case you have an existing HUF or are planning to set it up, tax implications need to be examined separately.
My husband is self-employed and his earnings vary between ₹ 5-10 lakh per annum. What are the tax benefits for a self-employed individual? How can one manage savings and buy assets in such a case?
—Name withheld on request
We have provided our response from an individual income tax perspective. Areas on managing savings or buying assets are best addressed by a financial planner.
Self-employed individuals are required to offer their income to tax under the head “Income from Business or Profession (IBOP)". Expenses incurred by such individuals towards earning such income can be claimed as a deduction against the gross receipts to arrive at the net taxable IBOP. However, the individual should maintain books or accounts and also original bills or vouchers to support all such expenditures, in case of any query from the tax authorities. One can also evaluate the benefit of presumptive taxation provisions under Section 44AD and 44ADA of the Income-tax Act, 1961(“the Act"), whereby only a specified percentage of the gross receipts is taxed (with no other actual expense claims), in case of certain specified business or professions.
There are also other deductions available against total income on making eligible investments or incurring eligible expenditure subject to specified conditions therein which would need to be examined on a case to case basis.
Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India. Queries and views at firstname.lastname@example.org