BackGifts from specified relatives are not taxed
Where a gift of cash is received by a daughter from a specified relative (i.e. father or mother), the transaction of gift itself will not give rise to any income tax implications in the hands of the donor or the receiver
PremiumMy wife and I would like to sell our apartment in Chennai, which is worth approximately ₹65 lakh. After the transaction, I would like to gift the sale proceeds in cash to my two daughters. What are the income tax implications? If my daughters want to invest the money in fixed deposits, which income tax rules will apply?
—Name withheld on request
We have assumed that you and your wife acquired the property after 1 April 2001 and the property has been held by you and your wife for more than 24 months. We have also assumed that your daughters are major (i.e. above 18 years of age).
The sale of property and the subsequent gift of sale proceeds to your daughters are two independent transactions from an income tax perspective.
Sale of residential property
As the residential house was held by you and your wife for more than 24 months, it shall be considered as a long-term capital asset and the gains arising out of the sale would be taxable as long-term capital gains (LTCG) in your hands.
Capital gains on the sale of a house can be computed as the difference between net sale proceeds (sale proceeds minus brokerage expenses) and the indexed cost of acquisition in the ratio of ownership between you and your wife.
The indexed cost of acquisition of the asset in your case would be calculated as the cost of acquisition / cost inflation index (CII) of year of acquisition x the CII of year of sale. (The CII prescribed for FY21 is 301). The CII for FY22 is yet to be prescribed. The tax is payable at 20% (plus applicable surcharge and cess) on the resulting LTCG. The LTCG will be calculated in your and your wife’s hands in the ratio of your funding towards the acquisition of the property.
In the case of sale of a residential house, an exemption can be sought in any of the following ways, subject to the prescribed conditions and timelines:
• Under Section 54 of the Income Tax Act, by investing your respective portion of LTCG in a new residential house located in India.
• Under Section 54EC of the Act, by investing your respective portion of LTCG in specified bonds.
• Under Section 54GB of the Act, by investing your respective portion of net consideration in equity shares of an eligible startup.
Gift to daughters
Where a gift of cash is received by a daughter from a specified relative (i.e. father or mother), the transaction of gift itself will not give rise to any income tax implications in the hands of the donor (i.e. you and your wife) or the receiver (i.e. your daughters). It would be advisable, however, for any such gift to be documented and placed in the records.
Further, if your daughters invest the cash received as gift in fixed deposits, they will need to offer the interest income thereon to tax, as applicable, in their respective tax returns.
Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India.
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