Photo: Ramesh Pathania/Mint
Photo: Ramesh Pathania/Mint

Gift received from a relative, as defined in the tax laws, is not treated as taxable income

A specified relative would include a spouse or siblings of a spouse, your siblings or siblings of either of your parents, etc

My relatives are going to send me about Rs4 lakh through Western Union for personal use from Malaysia. Should I pay tax on this income? If yes, kindly tell me the procedure for doing so. Currently, I am working in a private company and my salary level income does not require me to mandatorily file tax returns.

—Name withheld on request

A gift received by an individual is not treated as taxable income if it is received from a relative (as defined in the Indian tax law). A specified relative would include a spouse or siblings of a spouse, your siblings or siblings of either of your parents etcetera

In case you are receiving the gift from any person who is not a relative as defined in the Indian tax law, (for full list of such specified relatives, go here) the amount received would need to be offered by you to tax in India. You could either declare this income to your employer and request them to withhold applicable taxes from your salary income or discharge the taxes by paying advance taxes. The next instalments of advance taxes are due by 15 December 2017 and 15 March 2018 and 75%/ 100% of the tax payable would be due before the 15 December / 15 March respectively.

Irrespective of the mode of discharge of taxes, you may be required to file a return if your gross total income exceeds the basic exemption limit of Rs2.5 lakh.

My uncle had a few businesses that were in lot of debt. Unfortunately, he passed away recently and is now survived by his wife and three children. All of them are major. They have some land in my uncle’s name and are planning to sell it to settle the debts. What would be the most tax-efficient way to deal with this situation, with respect to capital gains that are liable to be paid? When the property is sold, the receivers of the proceeds will be his wife and the three children. All the proceeds will go towards clearing the debts.

—Pratapan

Assuming that the inheritance of the land by all the four legal heirs is documented, any capital gains arising on the sale of the land would be taxed in the hands of the legal heirs (in proportion to each heir’s share in the property).

When computing the taxable capital gains in the case of such inherited property, the period the property was held by the legal heirs will include the period the property was held by your uncle as well. Also, the cost at which your uncle acquired the land, as increased by any cost of improvement incurred, would be treated as the cost of acquisition in order to compute the capital gains.

If the property had been held from the date of acquisition (by the legal heirs as well as your uncle) for at least 24 months, the resulting gains are taxable as long-term capital gains (LTCG). Else, the gains would be taxable as short-term capital gains (STCG).

The difference between the net sale proceeds and the indexed cost of acquisition of the property is taxable as LTCG. Indexation refers to adjusting the cost of the asset based on the cost inflation index (CII) published by the income-tax department for the financial year (FY) of purchase and the FY of transfer. In this case, the FY of purchase by your uncle would be considered and if he purchased the land before 2001, the legal heirs may opt to use the Fair Market Value (FMV) of the land as on 1 April 2001, to compute the capital gains. The legal heirs will then be liable to pay tax at 20.6% (plus surcharge, if applicable) on the resultant LTCG.

A tax relief can only be claimed where the net sale consideration is re-invested in a residential property situated in India within the specified time (within 1 year prior to sale date or 2 years from sale date or within 3 years of sale date for an under-construction property), subject to fulfilment of other conditions under section 54F.

Alternatively, the LTCG can be invested in specified bonds issued by the National Highways Authority of India or the Rural Electric Corp. Ltd under section 54EC, within 6 months from the sale, subject to a cap of Rs50 lakh.

If the resultant gain or loss is taxable as STCG, the difference between the net sale proceeds and the cost of acquisition of the property (indexation is not permitted), at the slab rates applicable to the legal heirs in the year of sale.

Parizad Sirwalla is partner (tax), KPMG.

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