My father (60) purchased a flat in Mumbai in 1985. He wants to transfer it in my name and I will be sending him some money in exchange (less than the market value of the flat). Can we buy a government bond or a new property within three years to avoid capital gains tax?
If your father transfers the flat to you, as a sale, the resultant gain/loss would be taxable in his hands as long-term capital gains/loss (LTCG/LTCL), as the flat has been held for more than 24 months. LTCG is calculated as the difference between net sale consideration (actual sale consideration less brokerage expenses) and the indexed cost of acquisition and improvement. However, if the actual sale consideration is lower than the stamp duty value by more than 5%, the stamp duty value would be regarded as deemed sale consideration, for the purpose of calculating LTCG. Your father will also be required to deduct 1% tax of actual sale consideration as TDS and deposit it with Indian revenue authorities, if the actual sale consideration is ₹50 lakh or more.
An exemption from LTCG can be sought under Section 54 of the Income-tax Act, 1961 by re-investing it in a new residential house in India, within one year prior or two years after the date of transfer (in case of purchase) or within three years (in case of construction). If the cost of the new house is more than capital gains, then whole of LTCG shall be exempt. Otherwise, LTCG will be exempt up to the cost of the new house. An exemption can also be claimed under Section 54EC by investing the capital gains in notified securities. You can also invest the net consideration in equity shares of an eligible start-up under Section 54GB to claim an exemption. All these exemptions are subject to satisfaction of other conditions prescribed.
However, if your father (being a specified relative) transfers the property to you as a gift or under a Will, the transaction of gift/inheritance itself will not have any tax implications for both of you. Any money transferred by you to your father as a gift, would not give rise to any tax implications at the time of transfer. The income your father earns from subsequent investments will be taxed in his hands.
Generally, gift of an immovable property can be effected by a registered gift deed along with payment of applicable stamp duty, depending on the state where the property is situated. Also, gift of money should be documented legally viz. a gift deed. However, you should seek legal opinion on the appropriate documentation and stamp duty implications. The onus of proving that the transfer of flat and money between your father and you are gifts/irrevocable transfers would be on you and your father and there should be robust documentation to support the claim.
Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India