Economic Times |Sadhawa Mishra
As a person’s immoveable property is normally of high value, transfer of the asset should be chosen carefully because the method of transfer can have significant legal and tax implications. Following are various ways of transferring immovable property and the respective pros and cons of each method.
The modes of transfer can be divided into two types: (A) Those where the instrument of transfer needs to be stamped ad valorem and is mandatory to be registered and (B) Those where registration is optional and shall happen only on occurrence of an event.
Type A are as follows: (It must be noted that the registration fees and stamp duty will vary from state to state)
(1) By a Gift Deed
Under section 122 of the Transfer of Property Act, 1882, one can transfer immovable property through a registered gift deed. The immoveable property is transferred voluntarily without any consideration. Transfer through a gift deed is also irreversible and binding. To make the transfer valid it is mandatory to register a gift deed with the sub-registrar as per section 17 of the Registration Act, 1908, and section 123 of the Transfer of Property Act, 1882.
Generally, the transfer by way of gift is prevalent in cases where the transfer happens within blood relations as there is an exemption as regards stamp duty which varies from state to state. For instance, in Maharashtra, in case the property in consideration is a residential or agricultural property and is gifted (without any payment) to family members, then, the stamp duty payable is Rs 200. A residential/agricultural property can be gifted to blood relations without being liable to pay consideration unlike sale/conveyance deed.
The Income tax Act, 1961 specifies that capital gains arising out of a gifted property to blood relations are exempted from tax. However, income accrued from the gifted asset may be taxable.
(ii) By a Partition Deed
Generally the transfer by way of partition takes place in cases where the Karta of the Hindu Undivided Family (HUF) owns various/larger properties (land or otherwise) and wants to transfer the same to other family members Once the partition deed is executed, each member becomes the independent owner of his/her share in the property and is free to sell, lease, gift, etc. his/her asset.
The only issue that remains in this kind of transfer is that there will be only one title deed in original and various other owners won’t be able to hold the custody of the original. However, the same does not vitiate the ownership right of the individuals over the property/ies.
To attain legal validity, a partition deed must be registered with the sub-registrar of the area in which the immovable asset is located.
The parties involved in the partition will have to pay stamp duty charges (under the provisions of the Indian Stamp Act, 1899) and registration charges, to get the partition deed registered.
The beneficiaries are not liable to pay any capital gains tax after the division of a property through a partition deed.
(iii) By a Sale Deed
Under section 54 of Transfer of Property Act, 1882, sale is a transfer of ownership in exchange for a price paid or promised or part paid and part-promised. The most common way of property transfer is through a sale deed.
It is crucial for the Sale Deed to be registered in the sub registrar’s office. A Sale Deed if not registered does not pass the ownership to the buyer even if he has paid the full amount upfront to the seller. Stamp duty and registration fee are to be paid compulsorily for such transfer and such kind of transfer attracts capital gain tax.
(The Maharashtra government, in its budget for 2021-22, announced a concession of 1% over the prevailing stamp duty rate on property transactions, if the transfer of house property or registration of sale deed, is done in the name of women. Consequently, women buyers will now pay only 2 % of the property value as the stamp duty.)
(v) By a Relinquishment deed
Relinquishment deed is a legal document/instrument where a legal heir gives up or releases his legal rights in an inherited property for another legal heir such as his mother, son, daughter, brother, sister, etc. The transfer by a relinquishment deed is irreversible.
The said deed must be registered as per section 17 of the Registration Act, 1908.
The stamp duty is applicable only on the portion that is relinquished and not on the full property value.
Transferring the property via a Relinquishment Deed for a consideration will inevitably result in capital gains for the transferor and hence, no tax benefits would accrue to the transferor.
(vi) By a deed of trust
A trust is an arrangement by which the property of the author of the trust or settlor is transferred to another, the trustee, for the benefit of a third person, the beneficiary. In general terms, trusts fall into one of two categories, private trusts and public trusts.
As per section 5 of the Indian Trusts Act, 1882, s trust having immovable property and created through a non-testamentary instrument has to be declared through a registered written instrument.
Stamp duty on instrument of transfer (i.e., the Trust Deed) attracts a stamp duty of 2-3% of value of assets transferred under the Trust Deed. However, the State Stamp Act will be the final authority to decide actual levy of stamp duty.
When a property is settled under a Trust, it is practically a gift and provisions of section 56(2)(x) of the Income tax Act, 1961 will be applicable. Section 47(iii) exempts the transferor from capital gains tax under an ‘irrecovable’ trust. Please note if the trust is revocable trust, then exemption under Section 47(iii) is not available and such transfer would be subject to capital gains tax.
(vii) By an Exchange deed
Section 118 of the Transfer of Property Act, 1882 defines exchange as a transaction where two persons mutually transfer the ownership of one thing for the ownership of another, neither thing or both things being defined as money only. Property can also be transferred between the parties by executing two separate sales.
The stamp duty for the Exchange Deed will be the same as in a sale of immovable property. The stamp duty will be calculated on the basis of the property which has a higher value.
If there is an exchange of a residential property, the exemption can be availed under section 54 of the Income Tax Act, 1961. There will no tax liability for the owner who is exchanging the smaller flat for a bigger one. Similarly, if you acquire a smaller flat with the market value approximately equal to the indexed long-term capital gains, computed as on the larger flat, then there will be no tax liability. In under any circumstances, if the exchange of a residential property, commercial property or land is against another piece of land or commercial property, there can be no tax exemption. To claim an exemption on long-term capital gains occurring on such an exchange, one can invest in a residential home under section 54F or in capital gain bonds under section 54EC of the Income tax Act, 1961.
By a Will
In transfer by a Will, the vesting of the property will take effect, after the death of the person executing the Will and as per law of succession, the properties are transferred if a person dies intestate. However, the beneficiaries will only receive ownership post the death of the testator.
The Hindu Succession Act prescribes the rules relating to intestate succession applicable to Hindus, Sikhs, Buddhists, Jains. The Sharia Law is applicable to Muslims and the Indian Succession Act applies to Christians and other persons not covered by the Hindu Succession Act and the Sharia Law.
It is not mandatory to register a Will. A registration fee of Rs 200 is applicable, however, no stamp duty is levied in this case.
Moreover, any asset inherited, either under a Will or through the laws of succession, is exempted from income tax laws. Re-sale of property will attract regular capital gains by the beneficiary.
A probate adds a legal character to the Will. A probate is a legal process which authenticates/validates the Will as there is high possibilities of Will being challenged. The entire process of probate of Will takes at least six to nine months to complete. However, if there is any objection to the public regarding the Will, then the probate of Will process can even take up to 2 years to get completed. Thereby, making it a lengthy and time-consuming process. It is important to note that the probate of Will is not compulsory in all states.
Letter of Administration
Letters of Administration is a grant by the Court to a person other than a named executor or executors such as a close relation of the person who passed away. Typically, Letters of Administration will be issued by the Court when someone dies without a Will
After analysing various modes of transfer and its pros and cons, it can be concluded that the transfer by way of sale, though not cost effective and subject to is the most effective, recognised and prevalent as this mode of transfer gives an absolute, unconditional and unfettered right of ownership over the property. However, if the transfer is to be done within blood relations, then it is advisable to get the transfer done by way of Gift deed or relinquishment deed if one of the joint owners is releasing/transferring his/her undivided share in the property. Further, in case the owner of a property wants to enjoy the property during his/her lifetime and wishes to transfer it to his/her kin and kith on his demise, then the available option is to execute a Will which will take effect post demise of the Testator (owner of the asset who writes his/her Will).