Summary of this article
No gift tax on property transfers in India
Tax depends on donor-recipient relationship
Capital gains apply when gifted property is sold
In India, property gifting is a widely used method for transferring wealth, settling familial arrangements, and planning succession. Individuals often gift houses to their children, for assets to be passed on without a possibility of future disputes. While gifting property may appear to be a simple legal act, it has different clauses for different situations that must be understood as part of the Income Tax Act, 1961. Although there is no separate tax on gifts in India, gifting property can attract income tax depending on the relationship between the giver and the recipient. The nature and the value of the property also come into consideration.
The Gift Tax Act, 1958, was abolished in India with effect from October 01, 1998. Hence, there is no independent ‘gift tax’ that is payable just because a property is gifted between two individuals. Goldi Arora, Co-founder & managing director of Property Master, says, "In India, any properties given or transferred to certain relatives will not be subject to tax. There is no gift tax or inheritance tax, and no tax liability on account of income will be incurred by either of these two parties at the time of that transfer of property.”
However, this does not signal that the property will remain tax-free; only the gifting process remains so. The taxability of gifts is now overseen by Section 56(2)(x) of the Income-tax Act. Under this Act, certain gifts are taxed from the recipient's end. From this provision, if a person receives an immovable property without consideration, with stamp duties exceeding Rs 50,000, the entire stamp duty is treated as income from other sources and taxed accordingly. “Without consideration” here means the transaction is absolutely of no gain for the individual gifting it. While the stamp duty clause is, if the amount crosses over Rs 50,000, the entire stamp duty is borne by the recipient of the property and not by the person who gifts it.
The crucial exception to the rule is when the property is gifted by specified relatives stated under the Income Tax Act. The Income Tax Act considers the following relationships, like spouses, parents, children, siblings, and lineal descendants, valid for tax-free gifting. When a property is transferred or gifted from any such relatives, it is completely exempt from the tax formalities of the recipient. This clause makes intra-family property transfers a tax-efficient mechanism for wealth transfer within the family. Contrarily, if the property is gifted by someone who does not fall within the legal definitions stated by the law, the exemption does not apply. In cases like that, if the stamp duty exceeds Rs 50,000, the entire value becomes taxable for the one receiving it.
Taxability in India depends entirely on the relationship between the donor and the recipient; the value of the transaction is not regarded in the same way as a normal property purchase. This translates to the fact that even high-value properties can be gifted entirely tax-free, given that the relationship between the two parties fits the “relative” category set by the law.
From the donor’s perspective, gifting property does not trigger any immediate income tax liability. Under the Income-tax Act, a property gift is not treated as a “transfer” for the purpose of capital gains taxation procedure. Hence, the original owner does not have to pay tax at the time the property is gifted, no matter how much the property has appreciated in value. This makes gifting an attractive option for property transfers without triggering any taxation formality for the donor.
When it comes to the recipient, the income tax consequences depend entirely on whether the donor is a relative as defined by the law. If the property is received from a relative like a parent, spouse, sibling, child, or lineal descendant, they are exempt from paying any sort of tax, applicable in other circumstances. If the property is gifted from a non-relative and the stamp duty exceeds the stated threshold of Rs 50,000, the recipient must include the value of the property as income and pay tax as applicable to their income tax slab.
While there is no capital gains tax at the time of gifting, this becomes relevant when the recipient decides to sell the property in the future. When this happens, the cost of acquisition is considered to be the original cost; in addition, the holding period of the donor is also included when considering if it falls under short-term or long-term capital gains tax. This clause affects the tax payable when the property is sold by the recipient in the future, especially if the property is held for many years and has appreciated.
Gifting property to relatives in India is an efficient method to save on tax liabilities of transferring assets to relatives. While there is no gift tax in India, there are income tax implications that can affect the recipient in case the conditions are not met or the recipient plans to sell it in the future. “However, if that transferred or gifted party sells that property at any stage later on, he/she will have to pay Capital Gains tax, taking into account the acquisition and holding periods by the transferor,” adds Arora.
Given that the gifting of immovable property has long-term consequences attached to it, it becomes vital to seek legal advice before and during the procedures of gifting property for better tax planning.
