Tax Talk

I want to gift a part of my retirement funds to my wife. In whose hands will the interest income be taxable and will clubbing provisions be applicable?

— Vinod Dhume

According to tax laws, any sum of money received from a relative as gift is exempt from tax. The term relative includes spouse. Hence, the sum gifted by you to your wife shall be tax exempt in her hands.

Further, clubbing provisions would apply in respect of income accruing or arising to your spouse from any sum gifted by you. In case she makes a bank deposit of the gifted amount, bank interest earned on the same shall be taxable in your hands.

I had purchased a property in 2003 and sold it in 2012. In the meanwhile, I purchased another property in 2007 for which I received the occupancy certificate in May 2011. At the time of purchase and occupancy of the new property, I was in possession of the old property. I have the following queries:

i) In the calculation of the property sold, can I add the stamp duty and registration paid to calculate my indexed cost of the house sold?

ii) How do I account for the transfer fees paid to the society on sale of the house?

iii) Can I claim exemption under section 54 on the capital gain arising on sale of the residential house?

iv) If I cannot claim exemption under section 54 on purchase of this new property, can I claim it on investing the gain in the bonds available u/s 54EA?

— Hariharan

i) According to the Income tax laws, long term capital gains shall be computed by deducting from the gross consideration received or accruing on the sale of property, the following amounts, namely:

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

— The indexed cost of acquisition of the asset and the indexed cost of improvement.

The stamp duty and registration charges paid on the property purchased in 2003 are part of the cost of acquisition of the house property and therefore deductible to the extent it was borne by you.

ii) It has been held by the courts that any payment which is absolutely necessary to effect the transfer will be an expenditure which is incurred wholly and exclusively in connection with such transfer and hence, will be allowed as an expenditure.

Therefore, if the transfer fee paid by you to the society on sale of the house was absolutely necessary and incurred wholly and exclusively in connection with such transfer, it shall be allowed as expenditure.

iii) According to section 54 of the Income-tax Act, 1961, if an individual transfers a Long-Term Capital Asset (LTCA), being a residential house, the long term capital gains (LTCG) shall be exempt from tax if the individual has either invested in a new residential house within ‘one year before’ or two years after the date of sale of the old residential house. Alternatively, the individual can construct a new house within three years from the date of sale.

We understand that you purchased a property in 2007 under construction-linked plan for which you received the occupancy certificate in May 2011. Hence, it can be construed that the construction of the new residential property was completed in May 2011. According to the conditions laid down under section 54 of the Act, construction has to be completed within three years after the date of sale and not before the sale. Accordingly, exemption may not be available for gains made in 2012 on sale of house on the contention that you have constructed and not purchased the house in May 2011.

iv) Exemption under section 54EA of the Act cannot be claimed since it applies to long term assets sold before April 1, 2000. Exemption can be claimed under section 54 EC of the Act for investment in certain bonds subject to certain conditions mentioned therein. Please note that the limit of investment u/s 54 EC is Rs 50 lakh.

(The author is a practising chartered accountant)

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