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How to Save Capital Gain tax?

Amor Y (Employed) (28 Points)

30 December 2010

Please help.

My mother acquired land via WILL and want to sell it, but wants to gift it to her 3 sons and then sell it so that the Capital gain tax liability is split i.e all 4 can theb benefit from the capital gain exemption under various different sec54.

Is there any restriction on the duration when the gift and then the sale of the property needs to be separated apart? Or there is no such restriction.? As she is planning to gift it and then sell it immediately the next month.

Can the AO invalidate the gift by stating that the gift was done with the intention to save capital gain tax ?

Is there any other way through which my mother can sell the land and end up paying a lot of CGT as the gain arise is quite substaintial amount.

Any helpfull suggestion would be great.

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13 Replies

A____ __A (Student All-ways) (275 Points)
Replied 30 December 2010

You should focus your mind on Saving tax more rather than evading tax as there is no specific way out...What you can do is save tax by utilising sec.54s most easy and useful are 54EC ..will save up to 50,00,000 lacs ( Capital Gain ) in one F.Y...for that you need to invest in Gov.Specified bonds like NABARD,National Highway,Rural Electrification bond ..within 6 months from the date of Sell or Trnf ...hope this will help..a..bit..

Amogh (Service) (34 Points)
Replied 30 December 2010

I totally agree with A-oza....

@ Amor

When the land is gifted to three people and the same is immediately sold, it would be a long term capital gain. However no indexation would be allowed on the cost of acquisition since indexation is allowed from the yr in which the capital asset is actually held by the assessee. However, since yr of gift and sale are the same, there would be no indexation.

So try calculation tax liability in the name of the mother.... as per normal method with indexation

and then calculate individual tax liability in the hands of the Donee(without indexation). Try and compare the total liability.

Also the assessing officer can anytime object such sale. So it is recommended not to sell the land immediately after receiving the gift.

Amor Y (Employed) (28 Points)
Replied 30 December 2010

thx guys...my question still remains.

First, the captial gain arising is substaintial so if she does not gift the land and use the exemption she will end up paying hugh amount. But if she gifts it then all, then the 4 individual can take benefit of the exemption under there individual level

eg mother - 10cr -

1)bond investment of 1cr 2) buys land of 2cr and 3) buys house of 1.5 cr total =4.5cr

so she has to pay cgt on the remaing at 20% ie 10-4.5 = 6 which is around 1.2 cr .

But if she gift it to 3 sons then each individual can utilise around 3.33cr by

1) bond investment 1 cr 2) buys house 1.5cr and 3)buy land 0.83 cr,

Hope the above makes sense.

My problem is how can she save CGT. I though gift would be one option as per above, but if that is not going to work. Does anyone know if there are any other way to save CGT.

Any suggestion or help would be great

varalakshmi (Business and coaching) (39 Points)
Replied 30 December 2010

you can stil save tax by gift without indexation as instead of one person being taxed it wil be taxed in the hands of 3 persons. so u can save tax from tax rate difference.

varalakshmi (Business and coaching) (39 Points)
Replied 30 December 2010

after gift CG will be computed in the hands of 3 persons. so each of u can claim the benefit of exemption u/s.54 to 54ec.

Amor Y (Employed) (28 Points)
Replied 30 December 2010

Question : can she gift the land and then immediately sell it. Will that cause any problem when the AO looks at the case.

sahana Murthy (Student) (123 Points)
Replied 30 December 2010

Hi Amor,

If the land received by your mother is from her parents, then gifting will certainly raise an issue from AO.

However if the land has come from her husband then she along with sons will co owners of the land.

I would suggest you to transfer the land (however received) to the sons by changing the khatha (i.e subdivision) and then make the sale. This is subdivision would make adequate proof for AO.

Hope this helps

Regards

Sahana Murthy

Amor Y (Employed) (28 Points)
Replied 30 December 2010

Thanks Sahana.

Not sure what you meant by khatha (i.e subdivision). Please clarify what do you mean by changing khatha, is it a process.?

jayant singh kalra (as) (56 Points)
Replied 30 December 2010

Priod of trnfer would be a major issue for tax planning

& as accordingly you should plan wether to distribute property or nt as indexation effect is to be seen

U S Sharma (glidor@gmail.com) (21056 Points)
Replied 30 December 2010

Originally posted by : Amor Y
	Thanks Sahana. Not sure what you meant by khatha (i.e subdivision). Please clarify what do you mean by changing khatha, is it a process.?

registered partition between 3 sons and also mutated with municipal / local bodies and with BLRO in the names of sons, this will prove the authentic ownership of sons over the property.

Alok Siddapur (Consultant) (229 Points)
Replied 01 January 2011

Hi Amor,

First check whether the land is agricultural land or not. If it is agricultural land then it will be treated as capital asset if it is situated in any area within the jurisdiction of any Municipality or cantonement board having a population of 10000 or more OR

The land is situated in any area within 8kms from the local limits of any Municipality or cantonement board having a population of 10000 or more.

In the example given above you have mentioned about buying of land worth 2cr from the sale proceeds. This exemption is available under sec 54B only if the the land was being used for agricultural purposes for 2yrs immediately preceeding the date of transfer and has acquired another land for being used for agri purposes. So first check whether it is rural agri land or urban agri land

Amor Y (Employed) (28 Points)
Replied 02 January 2011

Hi Alok,

The land is agriculture as my mother cultivates it every year and it is within muncipal limits, which I believe will make it eligible for the section 54B exemption.

I have been able to find out that she can invest in the below three option mentioned. Please confirm if this incorrect.

1) Section 54EC - Bond of amount 1cr ( 50lac for 09-10 and 50lac for 10-11)

2) Section 54B - In agricultural land( any amount of capital gain arising)

3) Section 54F - In a residential house( any amount of net proceed)

But as I have said the amount is substantial and would like to use the sons individual exemption as ultimately they are her legal heir and she has already made a unregistered WILLl giving the property to the sons equally.

My question still stand : if she sells the property can she add her sons name to the sale deed as party to the agreement.