Properties when transferred to relatives as gifts can reduce charges and help save tax
Everybody loves a gift. Gifts are always welcome, especially on occasions like marriage, birthday or anniversary. But did you know that you can help your close relatives save tax by giving a gift in the form of movable or immovable property? Gifting is increasingly being considered as an effective instrument to pass on a property to relatives.
A gift is some property that you give to somebody without consideration – that is without money. It is an off-market transaction.
The instrument of gift is an effective means to transfer property in cases where the donor and donee are relatives. The donor is the one who gifts the property, while the recipient is the donee.
But, if the parties involved are not relatives, it may not be a good idea to transfer a property as a gift, since they would not be entitled to tax benefits.
The procedure for making a gift is not complicated, but it varies for movable and immovable properties.
IMMOVABLE PROPERTY
To gift an immovable property, all you have to do is to get your gift deed registered and stamped. The transfer has to be effected through a registered instrument, signed by or on behalf of the donor, and attested by at least two witnesses.
A gift in the form of an immovable property needs to be registered. If the gift is an immovable property, the registration procedure is similar to the registration of a sale deed for an immovable property with the subregistrar.
Your gift transaction will attract stamp duty. "As per the Bombay Stamp Act, 1958, stamp duty is generally about 5% of the value of the immovable property in Mumbai and some other areas; in some rural areas, it is less than 5%," says Surana.
The stamp duty will, however, be lower if the beneficiary is a relative. "In such cases (when the property is gifted to a relative), the stamp duty is 2% on the market value of the property," says Dalal. This is one of the biggest advantages of using the instrument of gift to transfer property to your relatives, points out Surana.
JEWELLERY
Grandmas can legally pass on their antique jewellery as gifts to grand-daughters. This would not attract tax at the hands of the receiver. Also, registration is optional when movable properties like jewellery are transferred as gifts.
In the case of gifts in the form of a movable property, the registration procedure is not necessary as per the Indian Registration Act.
Movable properties, like jewellery, when physically transferred, can be backed by a gift deed.
When the property gifted is movable, it must actually be transferred and handed over to the donee; a mere entry in a register or account book is not sufficient.
Stamp duty is applicable even if the transfer of jewellery to relatives through a gift deed is not registered.
Stamp duty rates are different in each state, if you execute a gift deed, you have to pay 2% of the market value of the jewellery as stamp duty if it is transferred to people who are immediate relatives. For transfer to third parties, the gift deed is to be stamped at 3% of the market value of the jewellery. Usually, after transferring the asset to relatives, people just write the fact about such a transfer in an affidavit.
SHARES & SECURITIES
The process is a little different for transferring shares.
For transferring shares, the share transfer form needs to be submitted to the company or registrar and the transfer agent of the company. Also, under Section 18 of the Indian Registration Act, 1908, it is optional to register a gift deed purporting to a share transfer.
The stamp duty rules are also different. While gifting shares/ securities held in a demat format, there shall be no stamp duty applicable. Under the Indian Stamp Act, 1899, the stamp duty payable on shares transferred in the physical form would be . 0.25 for every . 100 (0.25%) of the value of shares being transferred.
TAX IMPLICATIONS
There is no tax implication in the hands of either parties in respect of transfer (by way of gift) of property (other than specifically exempt property) where the donor and donee are relatives.
However, gifts received during a marriage or from parents and grandparents, and gifts received by a daughter-in-law from her parents-in-law or by way of a will or inheritance, are exempt from tax at the hands of the recipient.
The income arising from the property shall not be clubbed with the donor in many instances. In such cases, if the recipient of the gift does not have taxable income or has taxable income liable to tax at lower rates, it may reduce the overall tax incidence. This in turn results in widening of the assets, income and wealth base resulting in tax efficiency under the Income Tax Act and the Wealth Tax Act.
But if you are gifting property to people who are not your relatives, then you will not be entitled to these benefits. An individual receiving property from an unrelated party through an instrument of gift is liable to pay tax at the applicable rates on the fair market value/stamp duty value of the property, or the cost to the donor, whichever is higher.
