Property Transfer

Yes, in case of a sale, there are no complications involved as both the parties are seperate in the eyes of the Act. The mother in law will be liable to capital gains tax. 

If the transfer is in the nature of gift, then there is no tax in the hands of the receipient as the parties are covered under the definition of relative - Any lineal ascendent or desendent of the spouse of the individual which implies that the transfer of property from mother in law to daughter in law is not taxable. 

Once the house property is transferred to the daughter in law, the rental income arising from such property will be taxed in the hands of the daughter in law.