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Business News/ Money / Personal Finance/  What are personal effects and how are they taxed

What are personal effects and how are they taxed

  • A ‘personal effect’ is a movable property held by a taxpayer for their or a dependent family member’s personal use, and can include items like apparel and furniture

A specific provision in the income tax laws provides an exemption for gains made on the sale of personal effects.

Generally, any profit (i.e. gain) made by a taxpayer on the sale of an asset would be treated as a capital gain and income tax would be payable on such gain. But do you know that if you sell your furniture, car, scooter or even a dress and make any gain, it is not taxable? This is because of a specific provision in the income tax laws that provides an exemption for gains made on the sale of personal effects.

Generally, any profit (i.e. gain) made by a taxpayer on the sale of an asset would be treated as a capital gain and income tax would be payable on such gain. But do you know that if you sell your furniture, car, scooter or even a dress and make any gain, it is not taxable? This is because of a specific provision in the income tax laws that provides an exemption for gains made on the sale of personal effects.

A ‘personal effect’ is a movable property held by a taxpayer for their or a dependent family member’s personal use, and can include apparel, furniture, etc.

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A ‘personal effect’ is a movable property held by a taxpayer for their or a dependent family member’s personal use, and can include apparel, furniture, etc.

‘Personal effects’ do not include jewellery, archaeological collections, drawings, paintings, sculptures or any work of art, and income tax would be payable if the taxpayer makes any profit or gain from the sale of any of these six kinds of articles.

In this context, it may be noted that ‘jewellery’ includes ornaments made of silver, gold, platinum or any other precious metal, or any alloy containing one or more such metals. Precious and semiprecious stones are also treated as jewellery.

If any precious or semiprecious stones are set in any furniture, utensil or any other article, or worked or sewn into any wearing apparel, that article will be treated as jewellery and gains upon sale will be taxable.

Examples of what is and what is not ‘jewellery’

Many courts have held that the silver utensils used by a taxpayer and their family have to be treated as personal effects even if they are used only on ceremonial occasions. Even clothes meant for use only at weddings or formal occasions and not for daily usage are held to be personal effects as they are stitched for the personal use of the wearer. Therefore, gains on the sale of such articles would not be taxable.

On the other hand, courts have held that gold and silver coins or bars, even if they are used for pooja, are not personal effects. It has also been held that a foreign stamp collection is not a personal effect. This means that gains on their sale would be taxable.

Courts have also held that loose diamonds are not personal effects, but wooden temples, electrical fittings, fans and crockery can be treated as personal effects.

In any case, any immovable property, shares, stocks, mutual funds, etc. cannot be treated as personal effects and, therefore, gains made upon their sale would be taxable.

Precaution to be taken by taxpayers

It should be noted that while gains on the sale of personal effects are not taxable, losses incurred on the sale of such personal effects cannot be set off against other capital gains or income. Also, such losses cannot be carried forward.

There are instances where taxpayers have tried to consider an article or asset as a business asset to offset losses on its sale. But the income tax authorities have treated such articles or assets as personal effects and denied them the benefits of setting off the loss against other gains or income (if such an article or asset was factually meant for personal use).

It is also interesting to note that in some instances of property sale, the seller and buyer agree to the settlement of the value of furniture, fixtures, electrical fittings, etc. separately so that these articles could be treated as personal effects, which means that gains on the sale of these articles would not be taxable in the hands of the seller. However, in such instances, the seller should have sufficient documents of purchase of those articles, including bills/receipts for the amount paid, the source of investment, etc. Also, the market value of such articles should be justified, else the seller may face serious challenges in the form higher tax that may be levied by the authorities.

When you sell any moveable article next time, please check whether that article qualifies as personal effect to claim exemption from income tax on the gain you may make. In any case, you need to retain sufficient documents in the form of bills/receipts and bank statements, both for purchase and sale.

Prakash Hegde is a chartered accountant at Acer Tax & Corporate Services Llp, Bengaluru.

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