Photo: iStock
Photo: iStock

Income tax needs to be paid on long-term capital gains arising from sale of gifted land

If holding period exceeds 24 months, land shall qualify as a long-term capital asset and gains as LTCG

My grandfather, who is 75 years old, is planning to sell land worth around 10 lakh and give that money to me. I am planning to buy a new house in the same financial year. I want to know how we can avoid paying long-term capital gains (LTCG) tax. Will he need be to be a co-applicant or co-owner of the property? He can also gift the land to me and I can sell it to the buyer, or he can sell the land and gift the entire amount to me.

—Rahul

It is assumed that the plot of land being sold does not qualify as an agricultural land as defined under the Income-tax Act and, hence, the sale of the same triggers a taxable event. Also, it is assumed that the plot of land is not residential in nature and has been held by your grandfather for more than 24 months. Accordingly, the gains arising from the transfer of the same shall be LTCG. You have two options.

Option 1: Your grandfather sells the land, gifts you the money and you buy a house with your grandfather as a co-owner.

LTCG (computed as per the prescribed rules) on sale of such land will be taxable in the hands of your grandfather. A roll-over exemption against such LTCG may be available to your grandfather towards the following investments, subject to the prescribed conditions: Under Section 54EC, by investing LTCG in specified notified bonds; under Section 54F, by investing the net consideration in a new residential house in India.

However, to avail the exemption, the above investments would need to be done by your grandfather directly. If your grandfather gifts the entire sale proceeds to you, the above conditions are not fulfilled and the exemption would not be available.

The gifting of cash by your grandfather to you, being relatives, would not trigger any separate tax implications for either of you.

Option 2: Your grandfather gifts the land to you, and you sell the property and buy a house in your name.

The gifting of land between your grandfather and you, being relatives, would not trigger any tax implications.

The subsequent sale shall trigger capital gains in your hands. As the cumulative holding period of the land exceeds 24 months, the land shall qualify as a long-term capital asset and the same shall qualify as LTCG in your hands.

A roll-over exemption against such LTCG may be available to you under Sections 54EC and 54F, subject to the prescribed conditions and timelines mentioned earlier. Hence, in case you choose to invest the net consideration in a new residential house in your name, you shall be eligible for LTCG exemption, subject to certain conditions.

It may also be noted that, generally, gift of an immovable property can be effected by a registered gift deed and may be liable for payment of applicable stamp duty, depending upon the state in which the property is situated. Further, with respect to the gift of land, it will be advisable that any such gift be documented in a legal document via a gift deed and placed on the records.

Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India. Queries and views at mintmoney@livemint.com

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