A property will be inherited by my taxpayer friend and his two sisters in the near future. While registering partition deed of the above property, he would like to bequeath his share of 1/3rd of the property to the two sisters and receive money from them as per valuation on mutual consent. Are there any tax implications in such a transaction? How does one proceed with the declaration of this received sum?

Chandrasekhar

As per Income-tax Act, 1961 any property or sum of money received by way of inheritance is exempt from tax. Thus, the property inherited by your friend and his sisters shall not be taxable in their hands.

For the purpose of the above query, I presume that the transaction is not in the nature of a family settlement. In such a case, any profits/gains arising from transfer of a capital asset [being property of any kind (including any right) held by the taxpayer] is chargeable to tax under the head ‘Capital Gains’.

As per the provisions of the Act, relinquishment/sale of capital asset is treated as transfer and thus any profits/gains arising on such account is chargeable to tax under the head ‘Capital gain’. I presume that the property shall be first inherited by your friend and sisters by way of inheritance and thereafter your friend would transfer his share in the property. Thus, the consideration received by your friend shall be considered as a transfer and chargeable to tax under the head capital gain.

The cost of acquisition shall be the 1/3rd cost of the property for which the previous owner had acquired the same and the period of holding shall be considered from the date the previous owner had held the property to distinguish the gain/loss as a long term or a short term. Also, valuation of property should be as per the provisions of the Act which provides for stamp duty valuation as the consideration.

I constructed a house utilising the sale proceeds of a flat that was owned by me, within the stipulated time as per tax provisions. The plot on which the house is constructed is in the name of my wife, though it was purchased long back from my savings. The house has been given on rent. Please advise if I can show the rent as income for my wife.

Bishwaranjan Sahoo

As per the provisions of the Income-tax Act, 1961, an individual who transfers, otherwise than for adequate consideration, any house property to his spouse is deemed to be the owner of the property. In the instant case, not only was the plot purchased out of your savings but the entire construction was done out of the sale proceeds of the flat owned by you. Thus, you shall be considered as the owner of the property and the rental income from the said property will be clubbed with your income and taxed in your hands.

While computing taxable incomes for house property, the prescribed deductions viz. 30 per cent of Gross Annual Value, municipal tax paid and interest payment on housing loan (if any) can be claimed.

The writer is a practising Chartered Accountant. Send your queries to taxtalk@thehindu.co.in

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