Gifting And Tax-Saving On LTCG: Your Long-Term Capital Gains May Not Be Taxed In These Cases

While the budget 2024-25 increased the tax rate on long-term capital gains from 10 per cent to 12.5 per cent, there are some ways one can save tax on these gains.

However, these exemptions are only available in certain conditions like gifting to a certain set of relatives or investing in a residential property.

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Outlook Money spoke with experts to understand what are the exemption and tax implications.

Basics of Gifting and Tax-Free Transfers

CA Gopal Bohra, Partner at N A Shah Associates, explained “If someone owns two properties and wants to claim 54F after selling shares or another asset, one of the conditions is that the person should not own more than one residential property (excluding the new one). However, tax department may question on the genuineness of such gift”

On the tax liability of recipients, he explained, if the recipient of the gift sells the property, they can claim exemptions under Section 54 or 54F as per the usual rules. However, the timing of the gift and sale is crucial. If the sale closely follows the gift, the tax department may view it as a tax avoidance strategy.

Key Criteria for Gifting and GAAR Scrutiny

Similarly, Abhishek Mundada, Partner at Dhruva Advisors LLP, warned about red flags that could trigger General Anti-Avoidance Rules (GAAR).

“The most common red flag is gifting just before completing a sale transaction. For example, if the sale is finalized but the property is gifted before the formal transfer, it appears as a deliberate tax avoidance strategy. The tax department may invoke GAAR if the transaction lacks commercial rationale beyond saving taxes," Mundada said.

There is no statutory timeline, but you must prove the genuineness of the gift. If there is no pre-existing deal with a third party and the transfer is made purely out of love and affection, it reduces the likelihood of scrutiny, he added further.

Types of Exemptions and Their Limits

Mundada, explained, “If you sell a property and reinvest the amount in another residential property, you can claim a full exemption, provided you own no more than two houses at that point.

For example, if you sell a property for Rs 100 with a gain of Rs 90 and reinvest the entire Rs 90, no tax will apply. If you reinvest only Rs 70, the exemption applies proportionately, and you pay tax on the remaining Rs 20, as per Mundada.

For investments in government bonds, under Section 54EC, you can invest gains from non-residential assets in government bonds, and claim an exemption. However, there’s a limit of ₹50 lakh, and the investment must be made within six months of the sale, Mundada explained.

On upper caps for exemptions, he noted, “For reinvestment in residential property, the exemption is capped at ₹10 crore. If your gain or investment exceeds this, the additional amount is taxable.”

Legal Precedents and Relative Eligibility

Speaking about gifting to relatives, CA Naveen Wadhwa, Vice President, Research and Advisory Division at Taxmann, elaborated, “The relevant section here is Section 56(2)(x). This provision states that transfers of immovable property between defined relatives are tax-free. It includes blood relatives and extended family such as grandparents and uncles. However, some relationships are one-sided in tax treatment. For example, if you gift property to your maternal uncle, it’s taxable for the recipient. But if you receive a gift from your uncle, it’s tax-free.”

He emphasized the importance of understanding clubbing provisions. “Gifting to a spouse doesn’t shield tax liability due to clubbing provisions. Even if you gift the property, the income or gains from its sale will be taxed in your hands as the donor. However, gifts to parents or children who are adults are not subject to these clubbing rules.”

Special Considerations for Multiple Owners

Mundada provided insights on gifting property to multiple relatives. “If the property is gifted to multiple relatives, each becomes a co-owner. When sold, the sales consideration is divided among them, and each individual's tax liability is calculated based on their share of the proceeds and proportionate cost. However, GAAR may apply if the transaction appears to evade taxes.”

Tax exemptions apply only to irrevocable transfers. If the donor retains any control or rights, clubbing provisions apply, and it’s treated as gifting to oneself, as per Mundada.

Speaking on circumstances that justify the immediate sale of gifted properties by the receiver, Bohra said, “Events such as family emergencies, medical expenses, weddings, or education costs can justify the sale of gifted property. If such events occur after the gift, they provide evidence that the transaction wasn’t purely for tax purposes.”