Gift of Immovable Property- Taxation

Topic Covers:

1. Introduction
2. Chargeability
3. Exemption from tax
4. Tax treatment
5. Rural Agriculture Land
6. Conclusion

Introduction:

The most common and frequent question is regarding the tax treatment of immovable property received as a gift. In this article, we understand the taxability, exemptions i.e. when this transaction is not taxable, and other relevant provisions. Under the Income Tax Act, taxation of gifts is governed by section 56.

Chargeability:

According to Section 56(2)(x) of the Income Tax Act, Income shall be chargeable to tax where
Any person receives from any person,
Any sum of money without consideration exceeding ₹ 50,000
Any immovable property without consideration or adequate consideration
The provision of this section applies to every person i.e. individual, HUF, Firm, company etc. However, exemption for certain transactions has been provided through the provison of the section.

Immovable property received as a gift by an individual or HUF

Immovable property being land or building or both received without consideration by an individual or HUF will be charged to tax If the following conditions are satisfied:
Individual/HUF received an Immovable property.
The stamp duty value of such immovable property exceeds ₹ 50,000.
The immovable property is a capital asset within the meaning of section 2(14) for such an individual or HUF.

Exemption from tax

Immovable property received by an individual or HUF without consideration (i.e. as a gift) is not chargeable to tax
In the following cases, the gift of immovable property will not be charged to tax.
Property received from relatives.
Relative for this purpose means:
In the case of an Individual
Spouse of the individual;
Brother or sister of the individual;
Brother or sister of the spouse of the individual;
Brother or sister of either of the parents of the individual;
Any lineal ascendant or descendent of the individual;
Any lineal ascendant or descendent of the spouse of the individual; [As amended by Finance Act, 2023]
Spouse of the persons referred to in (b) to (f).

1. b) In the case of HUF, any member thereof.

2) Property received on the occasion of the marriage of the individual.

3) Property received under will/ by way of inheritance.

4) Property received in contemplation of the death of the donor.

5) Property received from a local authority [as defined in Explanation to section 10(20) of the Income-tax Act].

6) Property received from any fund, foundation, university, other educational institution, hospital or other medical institution, any trust or institution referred to in section 10(23C) [w.e.f. AY 2023-24, this exemption is not available if the property is received by a specified person referred to in section 13(3)].
7) Property received from a trust or institution registered under section 12AA or section 12AB [w.e.f. AY 2023-24, this exemption is not available if the property is received by a specified person referred to in section 13(3)].

Tax treatment:

Gift received by an individual on the occasion of his marriage will not be charged to tax
A Gift (i.e. immovable property received without consideration) received by an individual on the occasion of his marriage is not charged to tax. Apart from marriage gifts received by an individual will be chargeable to tax. Hence, immovable property received on occasions like birthdays, anniversaries, etc., without any consideration will be charged to tax.

Gift from friends

Immovable property received without consideration from relatives is not chargeable to tax (list of relatives has been discussed above). Friends do not fall in the above list and hence, gifts received from friends will be charged to tax (if other criteria of taxing gifts are satisfied).

Gift of immovable property located abroad

If the conditions of the taxability of the gift of immovable property are satisfied, then a gift of immovable property without consideration or with an inadequate will be charged to tax whether the property is located in India or abroad.

Illustration:

An Individual received a gift of a flat from his friend. The stamp duty value of the flat is ₹ 94,000. In this case, whether the total value of the gifted property will be charged to tax or only the value exceeding ₹ 50,000 will be charged to tax?
If the conditions of the taxability of a gift of immovable property are satisfied, then the entire value of stamp duty received without consideration, i.e., received as a gift will be charged to tax. Hence, in this case, the entire stamp duty value of property, i.e., ₹ 94,000 will be charged to tax.

Illustration

On 1-6-2023, Mr. Pratik gifted his house to his friend Mr. Ram. The market value of the building is ₹ 6,40,000 and the value adopted by the Stamp Valuation Authority for charging stamp duty is ₹ 7,20,000. Advise Mr. Ram regarding the tax treatment in this case.
In the given case, the property is a capital asset for Mr. Ram, the property is received from his friend (friend is not covered in the definition of relative), also the property is not received on the occasions of marriage and the stamp duty value of the property exceeds ₹. 50,000. This transaction does not fall under exemption criteria.
In other words, all the conditions that are required to tax the gift are satisfied and hence the stamp duty value of the property i.e. ₹ 7,20,000 will be charged to tax in the hands of Mr. Ram,  under the head “Income from other sources”

Rural Agriculture Land

The meaning of the term "property" is given in Clause (d) of Explanation to Section 56(2)(vii), immovable property means any land, building, or both. While defining the term "property" the word 'capital asset' has also been used in the explanation.
On this basis, it is being argued that, if any property is not a capital asset as per the definition of section 2(14), the same is not covered under the definition of property and therefore, provisions of section 56(2)(x) are not applicable. Examples of such cases are agriculture land, stock-in-trade, assets of personal effects etc.
The ITAT Jaipur Bench dealt with this issue in the case of 'ITO v. Trilok Chand Sain’  in the context of agricultural land. It has been held by the Hon'ble Bench that the definition of the term capital asset in section 2(14) of the Act is not relevant for the purpose of section 56(2)(vii) of the Act.

Conclusion

Section 56(2)(x) of the Income Tax Act states that income is chargeable to tax when an individual or Hindu Untouchable (HUF) receives money without consideration exceeding ₹ 50,000 or immovable property without consideration or adequate consideration. However, exemptions are available for certain transactions. Gifts of immovable property are not chargeable to tax in certain cases, such as from relatives (i.e. in blood relation), marriages, or inheritances. Gifts received on occasions like birthdays, anniversaries, or from friends are also taxable. Gifts of immovable property located abroad are also taxed. One should take a piece of advice from the experts before entering into such transactions.

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