Section 54f & gift for saving income tax

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

23 September 2013 One of My clents has sold a property and instead of keeping the money himself, he wants it to gift the same amount to his son

How can he do the same so that there is no income tax liability in such a case

There can be 2 options for the same

(i) Firstly, he himself purchases a property and gift the same to his son( in this case the amount of purchase & then transfer has to be beared by the persons)
(ii) Secondly he can gift the amount to his son and he can purchase the property in his name

Which option will be viable, or if there is any other way in which he can save income tax and also gift the property to his son, then please do guide

Nikhil Kaushik

Nikhil Kaushik (Expert)
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24 September 2013 choose option too...more tax efficient..lesser complications.

Querist : Anonymous

Querist : Anonymous (Querist)

26 September 2013 As per your advise option 2 is better, but how can it be moved on.

Also, as per Income tax rules the income will accrue to the assessee and he himself is liable to pay the tax, if any accrues.

Will the liability be shifted by making a gift to son?

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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23 July 2025 You're raising a very thoughtful and important question — how to gift sale proceeds to a son while minimizing or avoiding capital gains tax liability under Section 54F. Let’s unpack this clearly, because there are a few misconceptions in common practice.

✅ Facts Recap
Your client has sold a long-term capital asset (not a residential house).

He wants to gift the sale proceeds to his son, who will use it to buy a residential house.

The goal is to claim exemption under Section 54F and/or save tax, while also benefiting the son.

❗ Key Rule of Section 54F
Exemption under Section 54F is available only to the assessee who earns the capital gain, if he invests the net consideration in a residential house property.

🔴 So, your client must make the investment in his own name — not gift the money and have the son invest — otherwise no exemption under Section 54F is allowed.

🛑 Why Option (ii) (Gifting Money to Son to Buy Property) Does NOT Work:
Even if:

The entire sale proceeds are gifted to the son,

The son purchases a house in his name with that money,

👉 The capital gain still arises in your client’s hands, and since he did not invest in a residential house in his own name, he is not eligible for Section 54F exemption.

🧾 Also, gifting money does not transfer the capital gain — only the asset or funds. The tax liability stays with the original assessee.

📚 Case Law:
Basantraj v. ITO (ITAT Chennai, 2012) – Section 54F exemption was denied when the house was purchased in the name of son, even though the capital gain arose to the assessee.

✅ Why Option (i) (Assessee Buys the Property and Then Gifts It to Son) Does Work:
This is the correct and tax-compliant method, though less flexible.

Steps:

Your client invests the net sale consideration from the capital asset into a residential house in his own name — within the Section 54F timelines.

He claims the full exemption under Section 54F on capital gains.

After the purchase and claiming exemption, he can gift the house to his son.

🎁 Gifts to relatives (like son) are not taxable under Section 56(2)(x), so the son pays no tax on the gift.
✔️ Exemption is valid.
✔️ No clubbing applies as the son is major.

🧮 Illustration
Sale Consideration: ₹80 lakhs

Capital Gain: ₹50 lakhs

Your client invests ₹75 lakhs in a house (in his own name) within 2 years of sale.

He gets 100% exemption under Section 54F.

Later, he gifts the house to his son via registered gift deed.

✔️ No capital gains tax

✔️ Son gets the house without paying tax

❌ Not possible if he just gifts money to the son.

✅ Summary Table
Option Description Section 54F Exemption Tax Impact
(i) Assessee buys property in his name, then gifts to son ✅ Allowed ✅ Full exemption ✅ Tax efficient
(ii) Gift money to son, son buys property ❌ Not allowed ❌ No exemption 🔴 Capital gain taxable to assessee

✍️ Final Recommendation:
Choose Option (i): Let your client buy the house in his own name, claim Section 54F exemption, and then gift it to his son.

Ensure the purchase and gift are done via proper legal documentation (like registered gift deed).

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