Tax planning for property ltcg exemption

Tax queries 937 views 6 replies

KR

SDM

33 Points Joined June 2013

Hello,

A father intends to sell an old property(purchased in 1981) and distribute the sale proceeds equally as gift among 5 family members. For efficient tax planning, he intends to gift an equal share of the property to all 5 family members before selling it by including them as co-owners of property , and sell it soon after so that each gets 1/5th of sale proceeds directly. Here are my questions :

1) Will the sale proceeds be treated as LTCG in the hands of all 5 family members individually although the property will be sold soon after including them as co-owners (Original holding period is more than 3 years in the hands of father)?

2) If yes, can all 5 members individually use sec 54EC limit of 50 lakhs to invest in LTCG bonds like REC/NHAI or use section 54 individually to invest in different properties and claim LTCG exemption?

Appreciate any opinion on this tax plan.

Thanks

Replies (6)

Mihir

Wealth Manager

5293 Points Joined December 2008

When a person gifts an immovable property, the cost of acquisition computed at the time of sale shall be the cost of acquisition for the previous owner.

The cost of acquisition for each 5 family members shall be the cost of acquisition for the father in the year 1981. Therefore, the indexation shall be from the year 1981.

Each 5 members shall be liable to pay long term capital gain on the sale of the property. Exemption u/s 54 and 54EC is available to each members ie to invest in another property within 2 years u/s 54 and investing in the bonds within 6 months u/s 54EC.

The gift deed should be stamped and registered. Expressed acknowledgement and acceptance of the donee in the gift deed is a must.

KR

SDM

33 Points Joined June 2013

Thanks for the quick response Mihir. Just to make sure I've understood this properly, please let me know of this is calculation as an example is correct.

Let's say cost of initial acquisition by father(1981) - 10 lakhs

CII adjusted acquistion cost at sale (2013) - 15 lakhs (assumed for simplicity)

Sale price - 1.65 crore

--------------------------------------------

Net capital gain - 1.5 crore (1.65 - 0.15)

Capital gain for each of 5 family members (1.5c /5) - 30 lakhs

Can each of 5 family members invest their respective 30 lakhs in LTCG bonds under 54EC or buy a propery individually within 2 years under sec 54? Does it make Nil LTCG tax overall?

Thanks

Kiran

Mihir

Wealth Manager

5293 Points Joined December 2008

Yes.

Computation is given hereunder:-

Sale price:

Less indexed cost of acquisition to the previous owner (purchase price in 1981)

Less indexed cost of improvement if any

Less transfer expenses if any

Equals Long term capital gain

Long term capital tax at 20.36% (no tax if the above is invested)

Divide the long term capital gain by 5. That would be the amount to be invested by the members to have no tax liability with regard to long term capital gain

KR

SDM

33 Points Joined June 2013

I recently heard that if the property is sold soon after it's transferred as gift and registered to the family members, the gain will be treated as Short term caiptal gain in the handls of family members and LTCG exemption will not be available and hence they need to pay tax on sale proceeds as per STCG rule.

Could you asvise if this view is correct? But, I've also read from some forums and articles that in case of a gift to family member the holding period of Donee(recepient) for the purpose of calculating LTCG wil be the same as holding period of Donor and hence LTCG will be applicable and not STCG. Appreciate your thoughts on this topic.

Thanks

Kiran