Tax Savings on Sale of Assets Received as Gift

Gift of assets to various persons -relative and non relatives  involves different issues under Income tax Act which has many provisions to deal with gift of assets .When a person receives any capital asset as gift and later sells it, the question of capital gains arises. However, this posting will try to dwell on three important provisions related to application of capital gains provisions on sale of capital assets received as gift. Each

provision is applicable specific to the facts and circumstances involved.

1. No Capital Gains on Gift in donor’s hand

Under Income Tax Law ,section 45 determines capital gains on transfer of assets. The transfer of capital asset as gift , save transferor i.e Donor from any capital gains liability. The said exemption is given in section 47(iii) which does not regard gift within the meaning of transfer. Excerpt of the provision

47.Nothing contained in section 45 shall apply to the following transfers :— (i) ………. (ii) [***] (iii) any transfer of a capital asset under a gift  or will or an irrevocable trust

2. Period of holding of Gift  Under Donor Relevant

Under the Income Tax Act, the capital assets are charged to tax at different rates , based on the period for which it was was held before being sold . In shares, units or securities are held for more than 12 months, same is considered long term assets. In case of any other assets , holding assets more than 36 months , shall make asset as long term assets. The question is “whether the period of hold in hand of donor of asset should be taken for the purpose of counting total number of months , for determination of nature of capital asset- i.e STCG or LTCG ?”Answer is yes. The backing of law is under section Explanation 1(i )( b)  to section 2(42A) which provides that in determining the period for which the capital asset  is held by the assessee the period of holding of the asset is held by the assessee , the period of holding of the asset by the previous owner  has to be included. Read the provision

(42A) “short-term capital asset” means a capital asset held by an assessee for not more than thirty-six months immediately preceding the date of its transfer : Providedthat in the case of a share held in a company or any other security listed in a recognised stock exchange in India or a unit of the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of 1963) or a unit of a Mutual Fund specified under clause (23D) of section 10  or a zero coupon bond], the provisions of this clause shall have effect as if for the words “thirty-six months”, the words “twelve months” had been substituted. Explanation 1.—(i) In determining the period for which any capital asset is held by the assessee— (a) …… (b) in the case of a capital asset which becomes the property of the assessee in the circumstances mentioned in sub-section (1) of section 49, there shall be included the period for which the asset was held by the previous owner referred to in the said section ;

Example :You received 100 shares on 01/04/2011 from your father who bought the shares on 31/05/2010 . If you sell the shares after May 2011 , the gains shall be regarded as Long Term Capital Gains , because the period for determining whether share is short term or long term asset , shall include 11 months of holding in your fathers hand. So , In May 2011, total period ( in Donee’s hand and Donor’s hand ) exceeds 12 months.

3. Cost in hand of Gift Receiver

One of the important question is what should be the cost of capital asset in hand of recipient of gift. Should it be Nil or should the cost in hand of donor be the cost in hand of receiver of the gift. Income Tax Act , under section 49(1)(ii) clearly provides that if someone receives a capital asset as gift , the cost to the person who gave gift is the cost to the recipient of gift. Read the provision

49.(1) Where the capital asset became the property of the assessee— (i) …….. (ii) under a gift or will; (iii) the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be

Moreover, section 55(2)( b) (ii) provides that where the asset received as gift was bought by the Donor before 1/04/1981 , the Donee ( person receiving the gift ) has the option to substitute the cost to previous owner with the Market value as on 01/04/1981. For example :If you receive a land bought by your uncle in 1979 at Rs 1 Lkah  and say, you are selling it in 2011 after receiving as gift from uncle for Rs 1 Crore. In that case when you are taking the cost of land, you can , as per provision u/s 49(1)( b)(ii) , take the market value as on 01/04/1981 and then use indexation to know the amount of cost of acquisition. May God Give You Gift !