My mother-in-law is around 83 years old and has a property in her name. She is a homemaker and lives on family pension. She never had any taxable income and has never filed her income tax returns. Now she proposes to sell her property and distribute most of the money among her children. Will she have to pay tax on the gains from the property sale? Will the children have to pay tax? How can long-term capital gains (LTCG) tax be saved legally?
We are assuming that your mother-in-law is a tax resident of India under the Income-tax Act, 1961. We are also presuming that the property in question is a residential house which has been held by her for more than 24 months. Further, the property or the funds for purchasing the property were gifted to or inherited by her and no clubbing provisions apply currently.
In case she now sells the house, the sale transaction would trigger LTCG tax in her hands. A roll-over exemption can be sought by her against LTCG, towards following investments, subject to the prescribed conditions and timelines:
* Under Section 54 of the Act, by investing LTCG in a new residential house situated in India.
* Under Section 54EC of the Act, by investing LTCG in specified notified bonds.
* Under Section 54GB of the Act, by investing the net consideration in equity shares of an eligible startup.
In case she gifts the entire sale proceeds to her children, the above exemptions would not be available and LTCG on the sale of the house will be taxable in her hands.
A gift given to children shall not be taxable, both in her hands or her children’s hands as a gift received from specified relatives (including mothers and mothers-in-law) is not taxable, according to the Act. In case she chooses to directly gift the property (or a proportionate share in the property) to the children, the same shall not be taxable, both in her hands or her children’s hands, at the time of making such a gift. Any subsequent sale of the property would be taxable in the hands of the children in the manner discussed above and they can individually ascertain the roll-over exemptions. Stamp duty implications on gift of property to children should, however, be evaluated separately.
Also, it would be advisable for any such gift (cash or property) to be documented in a legal document such as a gift deed and placed in the records.
Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India. Queries and views at firstname.lastname@example.org