The Income Tax Appellate Tribunal (ITAT) has ruled that gifting an asset such as property or shares to a spouse does not attract capital gains tax at the time of the gift. However, any income generated from the gifted asset, such as rent or dividends, is added to the donor’s income and taxed accordingly.
The ruling clarifies that a gift to a spouse is not considered a sale for capital gains purposes, though any income arising after the gift is taxable in the hands of the person who made the gift.
It is important to note that the capital gains exemption applies by default to investment in only one residential property. However, if the long-term capital gains are less than ₹2 crore, an individual can invest in two residential properties, with this option available only once in a lifetime, say experts.
The legislative intent is quite clear behind Section 64(1)(iv) of the Income-tax Act, 1961 (IT Act). It provides that where an individual transfers an asset, either directly or indirectly, to his or her spouse without adequate consideration, the income derived from such asset including capital gains, is required to be clubbed with the income of the transferor. Without adequate consideration means transferring the property for little payment or no payment in return.
“Therefore, even in the event where a transfer has taken place through a valid gift deed, any capital gains arising on transfer of such asset are liable to be taxed in the hands of the transferor. Thus, simply executing a registered gift deed by itself does not shift the tax liability on capital gains to the receipt spouse,” says Kunal Savani, Partner, Cyril Amarchand Mangaldas.
{{/usCountry}}“Therefore, even in the event where a transfer has taken place through a valid gift deed, any capital gains arising on transfer of such asset are liable to be taxed in the hands of the transferor. Thus, simply executing a registered gift deed by itself does not shift the tax liability on capital gains to the receipt spouse,” says Kunal Savani, Partner, Cyril Amarchand Mangaldas.
{{/usCountry}}One may opt to reinvest the proceeds from such transfer of assets in a residential property one year before, two years after the sale, or construction of a residential property within three years, in order to claim exemption from capital gains tax u/s 54 of the IT Act.
“However, it is pertinent to note that such exemption is available by default for investment in only one residential property. Nonetheless, if the long-term capital gains are less than ₹2 crores, then one can invest in two residential properties, wherein, this option can only be availed once in a lifetime,” says Savani.
In this regard, the ITAT has also upheld that the capital gains on the sale of a property gifted by and between the spouses are taxable in the hands of the transferor u/s 64(1) (iv) of the IT Act, even where the recipient spouse is a registered owner of such property.
“Further, the transferor remained eligible to claim exemption on such capital gains from tax u/s 54, subject to fulfilment of conditions provided therein,” says Savani.
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ITAT allows Section 54 exemption for multiple flats
In other news, in 2015–16, a woman named Saroj sold her house in Punjabi Bagh, Delhi, for ₹2.7 crore and used ₹2.55 crore to purchase seven flats in Greater Noida. She claimed a ₹2.2 crore long-term capital gains (LTCG) tax exemption under Section 54 of the Income Tax Act.
The Income Tax Department initially denied the full exemption, granting only ₹36 lakh and added ₹1.8 crore to her taxable income. Saroj appealed to the Income Tax Appellate Tribunal (ITAT) Delhi, which ruled in her favour, recently deleting the additional tax and allowing her the full exemption.
“According to the law, eligibility for exemption under Section 54/ 54F on investment made in multiple properties can be claimed if the multiple residential properties function as a single unit,” says Vikrant A. Maheshwari, Principal Associate, DMD Advocates.
A multi-storeyed residential property can also qualify for exemption if used as a single residential unit by a family or is intended to be so used. The claim of exemption will not pass muster if investment is made in distantly located residential properties that practically cannot function as a single house.
The taxpayer shall have documents such as builder’s plan or architectural plan to demonstrate the layout. “The taxpayer shall also establish that multiple residential units are being used as a single residential house by his family,” says Maheswari.
Anagh Pal is a personal finance expert who writes on real estate, tax, insurance, mutual funds and other topics