A landlord owns a property (comprising land and an independent house on that land) in Chennai as 100% owner now. He plans to retain 25% ownership and settle 75% of the said property to his wife and two children. Once the settlement happens, the said landlord, his wife and two children become joint owners of the said property with 25% ownership each.
After the settlement, the four joint owners plan to enter into a Joint Development Agreement (JDA) with a developer, under which each of the owners will get one home in return from the developer. (Note: Two of the owners already own one or two properties each, whereas for the other two owners, this will be their first property ownership.)
Under this JDA arrangement, each owner gets a home in kind from the developer which becomes their capital gains. However, the owner also has an option to reinvest those capital gains into another property to get exemption from capital gains tax.
In this case, the owners are reinvesting their capital gains in the same property by retaining one home each in the joint development. In such a case, would the taxable capital gains for each owner be zero, regardless of how much the cost of acquisition of the property was?
Nature of transfer
The nature of exemption would depend on the nature of the asset transferred, which in turn would depend on the agreement entered into.
If the JDA provides for transfer of the residential house by the owners to the developer and, in consideration, the owners receive a residential house (with or without any monetary consideration) each, the exemption available would be under section 82 of the Income-tax Act, 2025 (erstwhile section 54 of the 1961 Act).
In such a case, the exemption would be available irrespective of the fact that some of the owners may already own one or two properties other than the new property. The condition that the owner should not own more than one residential property other than the new property is applicable only if exemption is claimed under section 86 (erstwhile section 54F of the 1961 Act). Section 86 applies only in case of transfer of an asset other than a residential house, and not to cases involving transfer of a residential house.
One important aspect is that to claim exemption under section 82, the new property must be constructed within three years from the date of transfer of the original property.
Capital gains computation
For determining the capital gains that need to be reinvested in the new property (which would be the stamp duty value of the new property), the sales consideration would be the aggregate of:
- The stamp duty value of the property received, and
- Any monetary consideration received, if any.
Further, the cost of acquisition in the hands of the children would be the cost in the hands of the previous owner, i.e., the father who had gifted the house.
If the gains are reinvested in the newly constructed property, the gains would be exempt up to ₹10 crore.
Gift considerations
Another important aspect is that one must be able to justify that the gift of the share in the original property by the landlord to his children is not undertaken solely for tax saving, but for a genuine non-tax reason, such as building up their assets and wealth.
Further, no part of the assets or income from assets received by the children should subsequently revert to the father, as this may cast doubt on the genuineness of the gift.
If the children are minors, then the capital gains, if any, would be clubbed in the hands of the parent whose income is greater.
Mahesh Nayak, chartered accountant, CNK & Associates.
