Transferring Share In Property To Spouse Will Not Reduce Donor’s Tax Liability

You can gift your share in the property t,o your wife or any other person. Your wife will not have to have any tax on the gift as she comes under the definition of specified relatives under Section 56(2) of the Income-tax Act, 1961.

Though there is no income tax implication per se on the value of the gift received by your wife from you, clubbing provisions will come into play. Under the Income-tax Act, 1961, if a person transfers any asset without consideration to his/her spouse, the income generated from that asset is required to be included in the income of the spouse who makes such gifts. This will happen year after year even if the asset changes its form. So this arrangement of transfer of your shares in the house to your wife by way of gift will not serve your purpose in reducing your income tax liability.

The tax benefits of home loan repayment are available under Section 80C and interest payment under Section 24(b) of the Income-tax Act, 1961. The EMI comprises two components- principal repayment and interest payment. Deduction under Section 80C is not available under the new tax regime. The deduction under Section 24(b) for self-occupied property is also not available under the new tax regime. In respect of let out property, the interest benefit is restricted to the amount of taxable rent.

So each of the borrowers who owns the property and is servicing the loan can claim the benefits in their respective ratio of loan being serviced by you.  As your wife is just a co-applicant and is not servicing the loan, she cannot claim the benefit under either section.

One can avail of the tax benefit under Section 54 for LTCG on sale of a residential house by investing the capital gains in another residential house. The investment has to be made in his own name. In case you gift the amount of capital gains to your grandson, the capital gains tax liability shall not pass on to him. 

So, unless you invest in your name, you cannot avail of the tax exemption. Your grandson cannot claim the exemption for LTCG earned by you even if he makes an investment in a residential house. 

Also note that the house has to be purchased within two years. In case you book an under-construction property or get a residential house constructed yourself, the house has to be completed within three years.

Since the purpose of you making a gift to your grandson is to ensure that he becomes owner of the property, it is advisable that you purchase the property in your name and bequeath it to your grandson in your Will. This will help you achieve both the objectives – exemption on LTCG and making your grandson owner of the property.