Tax Talk- May 28:: Business Line

My mother, along with her sisters and brothers, inherited a house from their brother who does not having any heirs.

The said property is an independent house in Chennai valued at around Rs 5 crore. Now they want to sell this property. What is the tax treatment for the proceeds made from this sale? Can they claim any exemption?

- Jooby Paul

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We understand that your mother and her siblings (i.e. her brothers and sisters) have inherited a residential house from your uncle as legal heirs. Further, all them will collectively execute the sale deed of the residential house in favour of the buyer.

Assuming that the residential was held for more than three years by your uncle (i.e. previous owner), it will be treated as a long term asset. According to the Income-tax Act 1961, (the Act), Long Term Capital Gains (LTCG) shall be computed on the sale of the house by deducting from the gross sale consideration received or accruing on sale of the long term asset, the following amounts, namely:

-The indexed cost of acquisition of the asset and the indexed cost of improvement;

-Expenditure incurred wholly and exclusively in connection with such transfer;

According to a plain reading of the Act, the cost indexation benefit shall be available to the seller from the year the asset was first held by him. However, reference can be drawn from various case laws to support the view that the benefit of cost indexation shall be available from the year in which such property was acquired by the previous owner, i.e. your uncle. In case your uncle acquired the house before April 1, 1981, the legal heirs have the option to use either the actual cost of the house or the Fair Market Value of the house as on April 1,1981 as its cost of acquisition for indexation purposes.

CAPITAL GAINS

The capital gains arising out of such sale shall be taxable in the hands of each of the legal heir at the special rate of 20 per cent (excluding surcharge and education cess), based on their respective share in the house.

Exemption from paying tax on the said capital gains can be claimed by each legal heir by individually investing in a residential house property or specified bonds provided the conditions specified under the Act for claiming such exemption are met.

I have transferred some securities held by me in my wife’s name. How do I need to report these transactions in my wife’s and my I-T returns, particularly in the year in which the transfers took place? The transfers are only for convenience, the ownership will remain with me for all practical purposes.

- Suresh Upponi

Where any asset is transferred by husband to his wife for inadequate consideration, any income earned by the wife from such asset is clubbed in the husband’s hands.

We understand that you have transferred your shares to your wife without any consideration. Hence, clubbing provision will apply and the income earned on such securities (dividend and capital gains from the sale of the transferred securities) would be clubbed with your income and taxed accordingly. According to the Act, dividend income is not taxable in the hands of the shareholders provided the company has paid Dividend Distribution Tax before distributing the dividend to its shareholders.

CLUBBED INCOME

The details of such clubbed income needs to be disclosed in your return of income under “Income of specified persons (spouse, minor child etc) includable in the income of the assessee” mentioning specified details of such person such as name, PAN, relationship. Your wife is not required to report anything regarding the clubbed income in her tax return.