Tax planning

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akanksha (Querist)
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03 June 2014 Hello

One of our client is owning a bunglow registered in his name. The bunglow used to have ground Floor Only. Recently a new first floor was constructed by the client taking a loan of Rs 1200000 on the property. Now the Client is living on the first floor.

Now my question is can the client sale/gift only the ground floor to its HUF?

If yes , then what will be the tax implications in case of

a) Sale
b) Gift

and whether the client can continue to claim interest deduction in house property as first floor is self occupied?

Thanks

akanksha

akanksha (Querist)
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03 June 2014 experts please reply

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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26 July 2025 Great question! Let’s break it down step-by-step for your client’s situation:

Can the client sell or gift only the ground floor of the bungalow to the HUF?
Yes, if the ground floor and first floor are separately identifiable units (separate entrances, distinct areas, and legally permissible), the client can sell or gift the ground floor to the HUF.
However, proper legal documentation and registration of the sale/gift deed specifying the exact portion (ground floor) must be done.
Tax Implications:
a) If the ground floor is sold to HUF:

Capital Gains Tax:
The client will be liable to pay capital gains tax on the difference between the sale price and the cost of acquisition/improvement related to the ground floor portion only.
If the ground floor was constructed earlier and first floor later, the cost should be bifurcated proportionately.
Period of holding, indexed cost, and exemptions (like Section 54 if applicable) will apply based on the holding period and nature of the asset.
HUF:
The HUF will be the new owner of the ground floor and can claim depreciation if rented out or any deductions applicable.
b) If the ground floor is gifted to HUF:

Gift Tax:
No gift tax in India currently.
Gift from an individual to his HUF is exempt from tax for the recipient (HUF).
However, for the client (donor), no capital gains tax arises at the time of gift.
The cost of acquisition for the HUF will be the cost to the client (donor) for capital gains purposes on future sale by HUF.
Documentation:
Gift deed is recommended, and registration is necessary to transfer immovable property.
Interest Deduction on House Property Loan:
Since the client lives on the first floor, which is self-occupied, the interest deduction on the loan related to the entire property can be claimed only proportionately for the part (first floor) that is self-occupied.
The portion of loan interest attributable to the ground floor (if sold or gifted and not self-occupied by client) cannot be claimed by the client.
Deduction limit for self-occupied property under Section 24(b) is Rs 2 lakh per year.
Proper apportionment of interest paid should be done based on area or construction cost between floors.
Summary:
Action Tax Impact on Client Tax Impact on HUF Interest Deduction
Sell ground floor Capital gains tax on ground floor HUF becomes owner Deduction on loan interest only for 1st floor (client’s portion)
Gift ground floor No capital gains tax on gift Cost of acquisition = client’s cost Deduction only for 1st floor
If the floors are not legally distinct or cannot be separately sold/gifted, this transaction might not be valid, so check local municipal and registration laws before proceeding.

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