Tax talk: Taxability of immovable property received as gift

GIFTS were brought in the ambit of the Income-Tax Act with effect from September 1, 2004. The provisions initially applied to monetary gifts alone. However, from October 1, 2009, gifting of immovable property was also included as taxable income, along with movable property. Since then, immovable property, i.e., land or building or both, received as a gift, is taxable as income in the hands of the recipient.

However, there are certain circumstances under which a gift (including an immovable property) will not be subject to income tax. One such exception is when the value of the property as assessed for stamp duty purposes does not exceed R50,000. It is pertinent to note that if an immovable property is acquired for a consideration that is less than the stamp duty value of the property and the difference is more than R50,000, such difference will be considered to be a gift received by the purchaser and taxed accordingly.

Further, if the immovable property is received as a gift under the following circumstances, it will not be subject to income tax in the hands of the recipient: They are gift received from a relative, received on marriage, under a will, by way of inheritance, from a local authority, gift received from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in section 10(23C) and gift received from any trust or institution registered u/s 12AA.

For this purpose, the following persons are considered to be ‘relatives’ of an individual — spouse of the individual, brother or sister and their spouses, brother or sister of the spouse of the individual as well as their spouses, brother or sister of either of the parents of the individual and their spouses, any lineal ascendant or descendant of the individual and their spouses.

So, if a wife receives a house as a gift from her husband, the gift will not be taxable as income in her hands. However, if she lets out the house and earns rental income, such income, instead of being taxed as her own income, will be clubbed with the income of her husband and taxed as his income. A similar treatment will apply to any capital gains she earns from the sale of the house. One, therefore, has to be aware of the provisions of the Act relating to clubbing of income as per which any income earned by the spouse or daughter in law of the individual out of assets transferred to them directly or indirectly will be clubbed with the income of the individual and taxed as his income.

An immovable property received as a gift, when sold, will be subject to income tax on the capital gain earned on the sale. For the purpose of determining the capital gains, the cost of acquisition will be taken to be the cost to the last owner who purchased it. Also, the holding period will be considered to be the entire period starting from the date when such owner first held it. To illustrate, say a property was purchased by A on April 1, 1999, for R3 lakh and was gifted to his son, B on October1, 2008. B subsequently gifted the property to son, C on April 1, 2014. The gifted property was sold by C on April 1, 2015, for R53 lakh.

The holding period of such a property for C would be 16 years, i.e., from the date of purchase by A on April 1, 1999, to April 1, 2015, and the cost of acquisition will be R3 lakh, i.e., the cost to A. The cost can be indexed for inflation since the holding period is more than 3 years. Transfer of immovable property, including a gift of immovable property, is also subject to stamp duty. Hence, even though a gift of an immovable property is not subject to I-T, it can still be subject to stamp duty. Some states have waived the stamp duty payable on the immovable property gifted to certain relatives. In any case, it is vital that the gift of an immovable property is documented by way of a gift deed and registered with the relevant sub-registrar’s office.

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