I am the owner of a shop along with my younger brother. We both had invested an equal amount while purchasing the shop. We have now mutually decided to transfer the 50 per cent share of one to another, so that the absolute ownership lies with one of us. We have been given to understand that the transfer can be effected either through a gift deed or through a sale deed transfer. Please advise which is the best way to effect the transfer of 50 per cent share and the tax implications.
Dhiren Shah
In respect of the transfer of property, whether a gift deed or a sale deed is executed depends upon whether or not a consideration is received/ paid for such transfer.
As per the Income tax Act 1961 (“the act”), any gains arising from transfer of any capital asset is chargeable to tax under the head “Income from capital gains”.
In case the property is transferred without consideration (i.e. by way of gift), no profit or gain would arise in the hands of the transferor and hence no income tax implications. Further, any immovable property received by an individual from any person without consideration or for a consideration which is lower than the stamp duty value of the property by more than ₹50,000, is taxable under the head “Income from other sources”.
However, an exception is provided in a case where the said property is received from a relative, which includes the brother of the recipient. Accordingly, gift of 50 per cent share of shop to transferee shall not attract tax implications in his hands.
In case the property is transferred with consideration (i.e. by way of sale deed), the gain arising from sale of property would be chargeable to tax in the hands of transferor. Sale of property shall be considered as a Long Term Capital Assets (‘LTCA’) provided it is held for more than 24 months before sale. In such a case, the transferor would be entitled for the indexation benefit for cost inflation while computing the cost of acquisition of the property.
In case the property is purchased before 2001, the indexed cost of acquisition shall be the fair market value as on 01.04.2001 as adjusted for the cost inflation index. The Long-Term Capital Gain, if any, arising from the sale of property shall be taxable at 20 per cent. However, if the property is held for a period up to 24 months, the same shall be considered as short-term capital asset and the capital gain arising from sale of such property shall be taxed at the applicable slab rates.
Please note that the above comments have been provided only from an income tax perspective. The transfer of property by way of registered gift deed or sale deed will also entail stamp duty payable as per the applicable laws.
The writer is a practising Chartered Accountant. Send your queries to taxtalk@thehindu.co.in