Taxation is the process of funding the government by imposing a financial obligation on the citizens to carry out various schemes and projects for the development of the country. To regulate such a process the government enacted the Income Tax Act in the year 1961 which was applicable from 1962.
As per section 2(47) of the Income Tax Act, the transfer in relation to capital assets is the transaction that allows the possession of any immovable property to be taken or retained in part of a contact of nature referred to in section 5(3A) of transfer of property act 1882 or any transaction, whether by way of becoming a member of or acquiring shares in a co-operative society, company or other AOP or by way of an agreement or any arrangement or in any other manner whatsoever which is effected by transferring or enabling the enjoyment of, any immovable property.
Transfer of property can be made by an act of parties or by the law. While processing with all legalities, the transfer fees are levied by the government (central, state, local) which is called Transfer Tax mentioned in Income-tax Act.
Transfer tax: the fee imposed by the authority on transferring the title of the property.
Sh.Gulshan Malik vs. Commissioner of Income Tax
In the light of the definition of “transfer” and “capital asset”, was of the opinion that “capital asset” has been defined in extremely wide terms – A reference to Section 2(47), which defines “transfer”, and particularly its second Explanation to Clauses (v) and (vi) made it clear that possession, enjoyment of property as well any interest in any of transferable capital asset was included within the ambit of “capital asset” court held that even booking the rights of purchasing or obtaining the provisional allotment letter will also be considered as a capital asset and will be treated as under section 2(47)of Income Tax Act and section 53 (A) of Transfer of property act.
Transfer modes and taxations:
- Gift: A gift tax is a federal fee on the gifted property without any consideration or returns. Gifts can be cash or property. However, the Internal Revenue Service Sets the lifetime tax exemption on gifts, which is counted yearly to keep pace with inflation.
Exemption: Gifts to a spouse, gifts from an inheritance, gifts to political organisations, or gifts to any trust are exempted from taxation.
The income Tax Act 1961 specifies that the capital gains from a gifted property to blood relations are also exempted from tax. However, income raised from the gift asset may be taxable. And stamp duties may differ from state to state.
- Sale: As the law says that on changing hands of property, taxes levied on the parties are important to act upon.
Property seller has to pay tax on the income received from the selling of the property and the property buyer has to pay the registration fee described by the respective states.
Taxed to be paid to sell the taxes by the sellers are of two types:
- Tax Deducted at Source (TDS) is applicable at 1% of the total sale consideration of the property as Sec 194 IA of the Income Tax Act, 1961. TDS is paid by the buyers on behalf of the seller at the time of purchasing the property.
- Capital Gains Tax is applicable on the profit received while selling the capital assets i.e. immovable properties such as land, house, building, apartments etc. for computation of the income tax.
|Short-term capital gain||Long-term capital gain|
|Applicable to a particular property is sold within 24 months of buying it||Applicable to a particular property is sold after 24 months of buying it|
|The gain will be added to the existing income of such an individual and taxed as per the applicable tax slab||20%|
Purchased price – Selling Price = LTCG/STCG
- Relinquishment: when the legal heirs give up their legal rights on their inherited property for other legal heirs on such property stamp duty is applicable only on portions that are relinquished and not on whole property and the registration process must be followed as per section 17 of the Registration Act, 1908. And in these types of transfer, no tax benefits would occur to the transferor and also transferor will get the capital gain on such property.
- Exchange: Section 118 of the Transfer of Property Act, 1882 says that exchange is the transaction where two persons mutually agree to transfer one thing for another that can be either money or property. This transfer can be executed by two separate sales.
The registration process will also be followed as per the Registration Act, 1908 and stamp duty for such Exchange will be the same as the sale of property and will be calculated on the basis of which has a higher value
Exemption: If the exchange property is residential then as per section 54 of the income tax Act 1961 there will be no tax liability for the owner who is exchanging smaller property for bigger. If a person purchased the smaller flat at a market price approximately equal to the indexed LTCG, computed as on the larger flat then there will be no tax liability.
- Partition: The Income Tax Act says that when there is a transaction for a particular property it will come under the purview of the taxation formalities. Since in the case of partition there is no transaction happens so the beneficiaries are not required to pay tax but the Capital gain will be applicable as per the type of property.
However, taxation is not required but the registration process is crucial for legal enforcement under section 17 of the Registration Act 1908, and the stamp duty must be paid.
- Mortgage: Mortgage tax is collected under property tax for income gained on mortgaged property. In India property tax has to be paid by the owner. Mortgage Interest Deduction is gained interest since it helps homeowners to lower the amount of tax owed on mortgaged property.
As per section 37 (1) of the Income Tax Act, A loan against property is non-taxable whether such property is made for business or personal purposes.
- Will: Transfer of property after the death of the person is considered a Will. In the case of a will merely transfer of possession of the property is necessary and so here no transaction happened so the taxation is not applicable here.
However, the income received from this property will come under the purview of Capital gain tax.
- Trust: Trust is not a legal entity, it is a non-profit-making institution with an obligation to work for benefiting others. As per section 5 of the Indian Trust Act 1882, the trust created by a non- testamentary Instrument must be registered. Stamp duty on such transfer will be 2-3% of the value of assets transferred under Trust under the trust deed.
The transfer of property to the trust is considered a gift and as per the Income Tax Act, the gifts are exempted from the taxation process. And if such transfer is an irrevocable trust deed then the trust is exempted from capital gains tax also but in case it is revocable then the Exemption will not be applicable and such transfer would be subjected to pay capital gain tax.
- Lease: As per the Income Tax Act, any income received from renting the property is taxable under the head ‘Income from house Property’ including the rents and deposit. 30% of the rental income is taxable under the head income from the house property as a standard deduction. For the Government there is no difference between residential property and commercial property, they bring both in one bracket as housing property and are taxable if granted.
Importance Of GST on Transfer of Property
Section 7(2) (a) of CGST, 2017 said that the sale of land and buildings does not come under the purview of GST but the scope of services related to immovable property can be included. Such services can be renting business, construction services, any lease, tenancy, easement, or license to occupy land either fully or partly comes under consideration of taxable services. The Full Input Tax Credit is 12% on the Purchase of under-construction or commercial properties. GST is only applicable to commercial assets not personal assets.
Govind Kumar Khemka Vs. ACIT
Portioned property is not considered as the transfer so when there is no transfer there is no capital gain and as a result, no tax liability is imposed on the parties.
ITO vs. Shri B. Kailasam & Cit vs. Attilli N. Rao
The court observed in this case that when the mortgaged immovable property is sold to recover the loan amount, the money received after selling the property, the capital gain profit belongs to the assessed and Capital gain profit and tax on full price must be computed.
Sarjan Dass & sons v. CIT
The court held that the mere identification of the donor and movement of the gift through banking channels is not sufficient to prove the actual gift is executed. Here the relationship and the intention is also necessary element.
As per the Income tax act 1961, the transfer which is specified in the transfer of property act 1882 is subject to capital gain tax and requires the payment of stamp duty and registration fees as per state provisions but the procedure depends on its type and also essential to scrutinize the applicable tax law.