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  • Tax Matters: Is there tax on transfer of inheritance?

    Every taxable person has to discharge self-assessed tax and other dues related to returns of the previous tax periods and the current tax period

    My parents died without leaving Will. They left an apartment, where my brother and his wife continue to live. On sale of the property, my brother gave me about 10% of the sale proceeds though I was eligible for 50%. I agreed to accept the amount out of love and affection. Also, my brother was passing through financial difficulty as he had incurred losses. Do I have to pay tax on the amount received?

    — Deepak Joiser, e-mail

    Adjustment of shares among family members does not amount to transfer. Hence, it is not liable for capital gain tax. When a family settlement is arrived at to avoid continuous friction and maintain peace among family members, the family arrangement is governed by the principles that are not applicable to dealing between strangers. Such a bona fide realignment of interest, by way of effecting family arrangement among family members, does not amount to transfer.

    In the case of Ram Charan Das v Girja Nandini Devi, the Supreme Court in 1966 noted that the consideration for a family settlement is in the expectation that such a settlement will result in establishing or ensuring amity and goodwill among the relations. Family transfer does not amount to a transfer as each party takes a share in the property by virtue of independent title admitted to that extent by the other parties. Every party who takes benefit need not necessarily be shown to have a share in the property. All that is necessary is to show that the parties are related to each other in some way and have a possible claim or semblance of a claim to the property on some other ground, say affection.

    A family settlement is a bona fide way to resolve family disputes and rival claims by a fair and equitable division or allotment of properties between the various members of the family, voluntary and not induced by fraud, coercion or undue influence. The members who were parties to the family arrangement should have antecedent title, claim or even a possible claim in the property acknowledged by the parties to the settlement.

    Courts have held that even if one of the parties to the settlement has no title but under the arrangement the other party relinquishes all its claims or titles in favour of such a person and acknowledges him to be the sole owner, the antecedent title must be assumed and the family arrangement will be upheld. The courts will find no difficulty in giving assent to it.

    The transfer of shares by family arrangement will not attract capital gain tax as it is a prudent arrangement to avoid possible litigation among family members, made voluntarily and not induced by any fraud or coercion. Therefore, the arrangement cannot be doubted.

    In the case of the Commissioner of Income Tax (IT) v R Nagaraja Rao, the IT Appellate Tribunal held that partition is not a transfer. What is recorded in a family settlement is nothing but a partition. Every member has an anterior title to the property that is the subject matter of a transaction. When there is no transfer, there is no capital gain. Consequently, no tax on capital gain is liable to be paid.

    In a family, a situation arises when an item of property is not capable of physical partition or, if divided, will lose its intrinsic worth. In such case, with a view to ensure an equitable partition, the item is allowed to one party. He is asked to pay compensation in money value to the other party. The amount is called "owelty". As the amount of compensation is only to equalize the inequalities in the partition, it is nothing but a share in the immovable property itself (though paid in cash). It cannot be treated as income liable to capital gain. If the amount is to be treated as income liable to tax, inequalities will set in as the share of the recipient will diminish to the extent of tax. The amount paid is not income liable to tax.

     

    Can you explain payment of goods and services tax (GST)?

    — Kanakiya, e-mail

    GST to be paid is divided in three parts. Integrated GST (IGST) is paid when inter-state supply is made. Central GST (CGST) and State GST (SGST) is paid when making supply within the state.

    The payment of tax due can be either by cash or through utilization of input tax credit (ITC). Payment of interest, penalty, fee and other payments have to be made through cash only, i.e., utilization of ITC is not available.

    Three ledgers have to be maintained by every GST tax payer. The electronic liability ledger reflects all return related liabilities (Form GST PMT-01). The electronic credit ledger reflects the ITC available (Form GST PMT-2). The electronic cash ledger reflects the total amount deposited by the tax payer for discharge of his tax liability, interest, late fee, penalty or any other amount (From GST PMT–5).

    To initiate payment, challan in Form GST PMT-06 is to be generated on the common portal in which details of the amount to be deposited towards tax, interest, penalty, fees or any other amount is to be entered. The challan is valid for 15 days.

    Whenever payment of any liability is made, the electronic credit ledger or the electronic cash ledger is debited. The electronic tax liability register is credited and will display the monthly net tax liability.

    Within the online GST portal, a unique identification number is generated for each debit or credit to the electronic cash or credit ledgers. The number is indicated in the corresponding entry on the electronic tax liability register.

    Every taxable person has to discharge self-assessed tax and other dues related to returns of the previous tax periods and the current tax period. He has pay any other amount due under the Act or as per the rules made including the demand determined under Section 73 or 74 of CGST Act.

    Utilisation of the ITC

    ITC available on

    Utilisation

    IGST

    IGST, (2) CGST, (3) SGST/UTGST

    CGST

    CGST, (2) IGST

    SGST/UTGST

    SGST/UTGST, (2) IGST

    CGST cannot be utilized for payment of SGST or Union Territory GST and vice versa.

     

    I am a landlord. I have more than one property containing a number of small units. I give them on rent. I have kept an employee as rent collector-cum-manager on a reasonably good salary. I am more than 60 years of age. I do not have business income. Hence, I believe I do not have to deduct the tax at source. Is my understanding correct?

    — Eshvar Vakhariya, e-mail

    Any person responsible for payment of salary is liable to deduct tax at the slab rates plus surcharge and education cess applicable to individual employees for the financial year in which payment is made for income chargeable under the head, ‘Salaries', according to Section 192 of the Income Tax (IT) Act, 1961.

    The status of the employer is not relevant for deducting tax under Section 192. There is no distinction between an individual, Hindu undivided family, firm or corporate entity. It does not matter whether the individual employer is carrying on business or profession or claiming such salary as deduction. An individual who derives only rental income from properties and engages employees for collecting rent has to deduct tax at source on the payment of salary when such payment exceeds the basic exemption limit.

    Again, the number of employees engaged by the employer is not a relevant factor. Even when the employer has engaged only one employee and the taxable salary of the employee exceeds the basic exemption limit, tax deduction at source (TDS) provision under Section192 is applicable.

    Tax is not to be deducted at source when the tax on salary income of the employee is ‘nil' after considering all the allowances and deductions an individual is entitled to under the IT Act. Accordingly, an employee is entitled to all exemptions provided under Section 10 and deductions contemplated under Chapter VI-A. The employer has to allow such claims by the employee and compute the estimated taxable salary for the entire year after obtaining the evidence or proof or particulars of prescribed claims, under Section 192 (2D) of the IT Act.

    Section 192 provides for allowance of deduction under Chapter VI-A. The annual circular on TDS restricts deduction under Section 80G to donations to certain specified funds. Therefore, even though an employee furnishes proof for donation, it is not considered in the computation of income for TDS under Section 192 unless the recipient is covered in the circular.

     

    I am about to turn 60. I have grand children. How should I go about estate planning?

    — Salil Pal, e-mail

    An estate plan comprises administration and disposition of property after the owner dies. It includes making a Will, setting up a trust, deciding on the nomination and buying life insurance. The process helps to avoid family disputes. Wealth and assets can be passed on to loved ones hassle-free.

    A grandparent might want to provide for his grandchildren's college education, medical needs, pocket money, residence, marriage and even starting of business. He might want to transmit assets to them at the right age.

    There might be a desire to ensure the future of grandchildren even if they are minors while undertaking estate planning. Communicate to them individually or through trust how they should use their inheritance. Grandchildren might handle their inheritance prudently. But they will have to be informed if there is any specific intention on the use of their inheritance such as for college education, buying house, starting a business, or something else. Clear instructions have to be given in the Will or to the trust.

    Money can make people act in unusual ways. Any ambiguity in the Will or trust can open the doors to greedy relatives to contest. Grandparents cannot foresee how old the grandchildren will when the inheritance is passed on. If they are under 18 or if they are financially immature, there are chances of putting the inheritance to improper use.

    Will is the simplest form of estate planning. A trust structure can also be beneficial as grandchildren get more control of the assets. A trust can be set up to ensure that the inheritance is used as per the desire of the grandparent. Instructions can be given when the inheritance should be passed on to the grandchildren.

    Private trust is a legal agreement of transferring movable or immovable property by an individual (settlor) to another party (trustee) for the intended use of the beneficiaries.

    An estate planner can be approached to help draw up the roadmap for the passing of the inheritance. However, understand how the plan works, what is needed to implement the plan and what it means for the beneficiaries. Take notes of the key decisions and why they have been made so that these can be referred to in future.

    Update the plan whenever there is a major change in the family such as birth, death, divorce or marriage. Change in the composition of the estate and net worth and other factors can also trigger a review of the plan.

    The replies are only in the nature of guidelines. The tax counsellors and the publication are not responsible for any decision taken by readers on the basis of the same.
    Readers may e-mail their queries on direct taxation to: tax-matters@capitalmarket.com

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