Special care should be taken by a person while transferring property to his relatives from the point of income tax. These aspects are discussed in this tip. The sections referred to are of the Income Tax Act, 1961.
If a person transfers only income from a property and not the property itself, then he continues to be assessable to income tax for the income from such property, despite the transfer, whether revocable or irrevocable. This is as per Section 60. Hence any person interested in a bonafide transfer of property to a relative should transfer it so that, not only the income of the property but the property itself is transferred to the transferee.
It is provided by Section 61, that if there is a revocable transfer of assets, then all income arising to any person would be chargeable to income tax as the income of the transferor and be liable to be included in his total income. However, even in respect of a revocable transfer of property, there is an exemption, viz. Where any income arises to the transferee by virtue of a transfer by way of a trust, which is not revocable during the lifetime of the beneficiary or in the case of any other type of transfer, such as by way of gift, etc., where it is not revocable during the lifetime of the transferee. However, one essential condition to be fulfilled in such a case (u/s 62), is that the transferor should not derive any direct or indirect benefit from such income in either case. It should be noted that, as and when the power to revoke the transfer arises, all income by virtue of such transfer would be chargeable as the income of the transferor and would be included in his income. The expression “transfer” includes any settlement, trust, covenant, agreement or arrangement. The expression “relative” for the purpose of the Income Tax Act, Section 2(41), in relation to an individual, means the husband, wife, brother or sister or any lineal ascendant or descendant of that individual, like father, son, etc.
Normally, the income of any property irrevocably transferred by the transferor to the transferee, should be assessed in the hands of the transferee only. But there are certain exceptions provided in Section 64(1) for the clubbing of income, where the transfer is made to certain close relatives without any adequate consideration. For example, where the transfer is without any adequate consideration, made by way of gift, then the transferor should not make any transfer of a property to his spouse and daughter-in-law, either directly or indirectly. Thus, if a property is gifted to any of the aforesaid persons by an individual, then the income from the property transferred, would continue to be includable in the total income of the transferor as per Section 64(1). It may be noted here, that a person can now make gifts of immovable property to one or more persons without any upper limit. But care must be taken to avoid the clubbing provisions as mentioned earlier. However, there is a tax planning device by which the clubbing of the income of an asset transferred to a close relative can be avoided. Thus, a married lady should not receive any gift from her husband, father-in-law and mother-in-law. If, however, gifts are received by a lady just before marriage, as pre-nuptial gift of property, it will not be liable to be included, as held in Philip Thomas vs CIT 49 ITR (SC) 97 by the Supreme Court, where such pre-nuptial gifts are made to an unmarried lady only.
Under the Hindu Law, a co-partner can impress his self-acquired property with the character of a joint Hindu property by making a declaration to that effect. However, Section 64(2) provides, that from January 1, 1970, if any person transfers his self-acquired property to his Hindu Undivided Family (HUF), then the income from such transferred property would still be included in his own individual assessment. Hence, this should be avoided. However, a transfer can still be made to a separate branch of the HUF, i.e. of the married son, grandson or brother, etc., without attracting Section 64(2). In this manner, a separate income tax file of the separate branch of the HUF of the married son or the married brother, etc. could be created by an individual through a special gift of property.
Sometimes, properties are transferred for the benefit of a future relative, like the would –be wife of a son or would-be husband of a daughter, etc. Such a trust, for the benefit of an unborn or future relative is valid under the Transfer of Property Act. It has also been held by Courts in India, that such trusts for unborn persons are also valid. However, it is provided under Section 164(1), that where such a transfer is made, the income from such a transfer generally made to close relatives, unborn, indeterminate or unknown at the time of transfer, are liable to tax at the maximum rate of tax. But an exception is provided under clause (1) of first proviso to Section 164(1) whereby, if such a trust is the only trust made for the benefit of the unknown person and the beneficiaries do not have any other taxable income, then the income of such a trust is assessable at the normal slab rates applicable to an Association of Persons, that is, like an individual. This is also confirmed by the CBDT circular No. 577, dated September 4, 1990.
A discretionary trust can be created through the provisions of a ‘Will’ in such a manner, that it is the only trust so declared by the Will, so that it becomes assessable as a separate taxable entity, liable to tax at the slab rates applicable to an AOP or an individual and not at the maximum rate of tax. Such a trust could provide for property to be given to the wife, children,
Taxation : Transfer of Property to Relativesgrandchildren, future grandchildren, great grandchildren, etc., of the testator, i.e. the person making the Will.
While making a transfer of immovable property to relatives in general and other taxpayers in particular, a person would derive immense benefit by observing the aforesaid principles of Income Tax Law.