Raksha Bandhan: Can a brother gift property to his sister? Know the tax rules

This Raksha Bandhan, remember, a brother can gift property to his sister without immediate tax, but there are implications when she sells it

A property gift between siblings may be a gesture of affection, but when it comes to real estate, the tax story doesn’t end with the gift deed. A brother can gift property to his sister without an immediate income tax liability for either party, since siblings qualify as ‘relatives’ under Section 56(2)(x) of the Income Tax Act, 1961.

Raksha Bandhan: A brother can gift property to his sister without an immediate income tax liability for either party (Photo for representational purposes only) (ChatGPT generate image)

However, the tax implications come into play when the sister eventually sells the property. Under Section 49, the cost of acquisition for calculating capital gains is not the property’s market value on the date of the gift. Instead, it is the original purchase price paid by the brother. The sister also inherits the brother’s holding period for determining whether the gains are classified as short-term or long-term.

“A brother gifting property to his sister is fully permissible and tax-neutral under Section 56(2)(x) of the Income Tax Act, 1961, since siblings qualify as ‘relatives’. No tax liability arises at the time of transfer,” explains Vivek Jalan, Partner, Tax Connect Advisory Services LLP, a pan-India multi-disciplinary tax consulting firm.

However, when the sister sells the property, Section 49 comes into play, with the brother’s original purchase price becoming the basis for calculating capital gains. His holding period is also inherited for this purpose, Jalan explains.

The gift should be executed through a properly registered gift deed to establish legal validity, and the sister must maintain documentary evidence of the brother’s original cost of acquisition to substantiate the capital gains computation. In short, while the gift itself is exempt, the eventual sale is fully taxable, with the law ensuring that family generosity is respected but monetisation is brought within the tax net, Jalan said.

If a property is gifted by a brother to his sister, who qualifies as a ‘relative’ under the Income Tax Act, there is no tax for either party at the time of the gift. This exemption applies even though the property is transferred without any monetary exchange. However, the relationship must be that of a blood relative; only then is the transaction exempt in the hands of the sister.If the sister gives something in return (for example, an expensive gift), the transaction may be seen as an exchange rather than a gift, which would attract tax. To avoid this, it's important to document the transaction clearly as a gift, not a barter, say legal experts.

Why the definition of ‘relative’ matters

According to experts, gifts from certain specified relatives are exempt from tax under Section 56 of the Act. These include: Spouse of the individualBrother or sister of the individual or their spousesBrother or sister of either parent of the individualAny lineal ascendant or descendant of the individualAny lineal ascendant or descendant of the spouseGifts received under a will or through inheritance are also exempt from tax for the recipient, he said. Under tax law, not all family members are treated equally for gift exemptions. For example, while a gift from an uncle to a nephew is tax-exempt, the reverse—a nephew gifting to an uncle—may be taxable in the uncle’s hands. This asymmetry makes it important to verify if the recipient qualifies as a relative under the Income Tax Act, say experts.

The gift deed acts as a record for the gift. Maintaining a gift deed can serve as proof for both parties in the future and for tax purposes. Registration of gift deeds depends on the nature of the property. For instance, for immovable property, it is mandatory to have a gift deed registered. In the case of a gift of movable property, it is generally not mandatory to have a gift deed registered, say legal experts.