Property Gifting in India: Tax Rules Families Should Know

It is common for property to be gifted within a family for the transfer of wealth across generations. The parents can give their children a property, the grandparents can transfer their plot to the grandchildren, or even one member of the family can choose to gift another family member a property without receiving anything in return.

However, although this seems easy enough, there is some legal knowledge that should be taken into account when transferring property in India.

What Is a Gift of Property?

Gift refers to a voluntary transfer of ownership of any immovable property which does not involve the payment of any money or consideration to the giver. In case of any immovable property like a house, flat, plot, or land, the transfer is effected through a registered instrument which has to be executed by or on behalf of the giver and witnessed by two witnesses at least.

This document is called a deed of gift.

Is a Gifted Property Taxable?

The treatment of taxes depends, in part, on the identity of the receiver of the property.

According to the income tax laws, receipt of immovable property without consideration shall be taxable in the hands of the recipient if the stamp duty value of the property exceeds ₹50,000. But there is an important exception for receipt of property from a specified relative.

A specified relative includes relations such as parents, children, spouse, brothers/sisters, grandparents, and in-laws. Care must be taken to check the precise statutory provision for a particular family relation.

Receipt of property under a will or inheritance is also covered by the gift exemption.

What About Stamp Duty and Registration?

Taxation and property registration are two independent issues. Although a particular gift may not be treated as an income, there might still be stamp duties and costs associated with registration of the gift.

Such fees depend mostly on the state laws. Some states provide exemptions to gifts made within the scope of certain family relations, although the fee will be determined differently depending on the type of the property being gifted and the familial relationship.

Thus, it is essential for the family to find out about such requirements in their state.

What Happens When the Recipient Sells the Property?

Just because one inherits the property as a gift does not automatically exempt him from paying capital gains tax in the future.

In the event of a sale after the inheritance of property, the income tax provisions consider the cost incurred by the previous owner while considering capital gains in instances where Section 49 applies. The improvement expenses of the previous owner might be important too.

The holding period for such inherited properties via specific means including a gift might be carried over from the previous owner. This can have an impact on whether it is treated as a short-term or long-term capital gain.

As far as immovable property is concerned, the Income Tax Department currently holds that 24 months is normally significant.

Can a Property Gift Be Cancelled?

The transfer of a property through gift should not be looked upon as an informal arrangement within the family. When there is a valid gift, the same cannot be usually revoked just because the donor feels otherwise later on.

In some instances, the Transfer of Property Act provides for revocation of the gift, such as cases where there is a valid agreed condition or a rescindable transaction of a contractual nature.

Thus, proper drafting becomes even more significant.

Documents and Professional Advice Matter

The original property papers, identity and address proofs, property papers, gift deeds, registration papers, and the tax papers should be preserved by the family. Title of the property also needs to be verified prior to the transfer.

Professional legal and tax counsel may be helpful prior to entering into the gift deed because there may be differences in stamp duties, registration issues, ownership problems, and taxation implications depending upon the situation.

Property giving is an effective means of transferring family properties, but this process should be treated as a legal deal and not as a family agreement. For those families who are looking at the possibility of residential or commercial property options and need help in deciding about property, Alvis Estates will prove helpful in guiding property buyers/owners about real estate options available to them.