Tax implications of property gift and sale explained for family members

My mother-in-law owns the residential property where we all reside. My husband passed away last year, leaving behind a daughter and a son. The daughter is now 21 years old, and the son is 15 years. She has decided to sell the property to fund the purchase of a house for me and my children. For this purpose, she has gifted a 25% share in the property each to me, my minor son and the HUF of my late husband, retaining 25% for herself. The gift deed has duly been registered. The transaction of gift has been recorded in the records of the society. What are the tax implications of this arrangement?

This arrangement has tax implications at two stages. The first is the stage of gifting a share in the property; the second is when the property is sold. Gifts are taxed in the hands of the recipient if the aggregate of gifts received from all the sources exceeds Rs. 50,000/- in a year. As long as the aggregate value of all the gifts received in a year does not exceed, the same is not treated as income. However, gifts from certain specified relatives are not treated as the recipient's income. The definition of relatives includes mother-in-law and grandmother as well. HUF's members are only regarded as their relatives for this purpose.
 

Understanding tax implications of gifting property: Clubbing provisions and capital gains Explained

So, as far as the gift of 25% of the share in the property to your son and you is concerned, the same is not to be treated as your income or your son’s income as mother-in-law and grandmother are included in the definition of relatives. However, the market value of 25% share in the property gifted to the HUF of your husband will be treated as income of the HUF as the value of 25% share in all probability will be more than Rs. 50,000/- as your mother in law is not a member of HUF of your husband.

Clubbing provisions will come into play concerning gifts made to you and income arising to your son from the gift received by your son. Any income from assets gifted to a daughter-in-law must be included in the hands of the parent-in-law who gifted the asset. Moreover, any passive income, like rent, interest, dividend, etc., accruing to a minor child must be clubbed in the hands of the parent with a higher income. In case of separation or death of one of the parents, the income will be clubbed with the income of the parent who is maintaining the child.

The clubbing provisions will cease to apply once your son becomes a major. Please note that the clubbing will continue to apply even if the asset gifted is converted into any other form.

Clubbing provisions will not apply concerning income from the 25% share transferred to the HUF of your husband, and the income will be taxed in the hands of the HUF.

Since this is a self-occupied house property for which no income arises, the clubbing provisions will not impact you or your son. If the house is let out, the income from the house property computed following income tax laws will be clubbed as discussed above.

At the time of the sale of the house, the clubbing provisions will also come into operation, and the share of capital gains will be clubbed as discussed above. It is presumed that the house property was bought at least two years before the date of sale, and therefore, the capital gains arising on the sale of the house would be long-term capital gains eligible for exemption under Section 54. Under Section 54, a HUF and an individual can claim exemption from long-term capital gains tax if the capital gains realised on the sale of a residential house are invested in another residential house property within the prescribed period.

Please note that the taxable capital gains will be computed after giving effect to the exemption available under section 54 for purchasing a residential house. Please ensure that you all four invest the long-term capital gains for buying the residential house property as joint owners so that each one of you can claim exemption under Section 54.

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Balwant Jain is a tax and investment expert and can be reached at jainbalwant@gmail.com and @jainbalwant on his X handle.

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