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  • Tax Matters: What should be the tax on the inheritance given to sibling?

    There is no conveyance or transfer of a property. Hence, it is not a transfer of a capital asset but an arrangement for settling the interest and rights of the family members

    My father and mother expired without leaving a will. They have left a property where all their children are staying. Before the death of my parents, my elder sister got married. She has been mentioned as a nominee in the records of the society. The entire society was acquired by a builder for re-development. The builder paid me Rs 3 crore. After receiving the money from the builder, I paid Rs 30 lakh to my sister. In the society's agreement with the builder, my name is mentioned as the owner of the apartment. In such circumstances, can I deduct Rs 30 lakh paid to my sister from the gross consideration of Rs 3 crore to arrive at my long-term capital gain? While doing so, do I have to take only 90% as cost of acquisition for the property inherited or the entire 100%? How should my sister account for the sum she has received?

    — Jyotindra, e-mail

    In the absence of a will, succession laws come into effect. As per the Hindu Succession law, if a Hindu man leaves behind a property without a will, it is primarily passed on to class I heirs including the widow, children and mother in equal share. Property received as inheritance it is not taxable for the receiver. When the inheritor sells it, capital gain on the sale is taxable for the inheritor.

    The property did not cost anything to the inheritor. For calculation of capital gain, the cost to the previous owner is considered as cost of acquisition of the property. Indexation will also be considered from the year in which property is inherited. However, courts have taken a view that for inherited property, the tax payer can claim indexation from the year in which the previous owner who had paid for it had acquired it.

    If the asset was purchased before 1 April 2001, substitute the market value as on the 1 April 2001 for the cost of acquisition and get indexation benefits from 1 April 2001 even if the property is inherited later. If there are more than one inheritor, the first step is to calculate the gain of the total property. The gain is then divided among the owners in the share of their ownership.

    In the case of the Commissioner of Income Tax (IT) v A L Ramanathan, the Madras High Court (HC) in 1998 ruled that realignment of interest by way of family arrangements among family members cannot be construed a transfer. Therefore, liability of capital gain tax should not arise in such cases. In the case of CGT v D Nagrirathinam, it was held by the Madras High Court that even the value of such property received by a recipient cannot be treated as a gift as the transfer is still for a consideration, i.e., to buy peace in the family. Neither capital gain nor gift tax is attracted.

    In the case of BA Monota Textile Traders Pvt Ltd v Deputy Commissioner of IT (CIT), the Bombay HC contended that no capital gain is attracted as there was no transfer but a family arrangement and, hence, there was no transfer of a capital asset. The tax payer had merely inherited the share on behalf of her late husband from the property belonging to her father-in-law. The share had been relinquished in the family arrangement. All the parties with antecedents' rights mutually agreed for settlement of the shares. Such a family settlement did not tantamount to any transfer of a title although it was similar to a partition of the family asset among the members and is not regarded as a transfer under Section 47(i) of the IT Act. A family settlement only settles the conflicting claims that had pre-existing joint interest to a separate interest.

    There is no conveyance or transfer of a property. Hence, it is not a transfer of a capital asset but an arrangement for settling the interest and rights of the family members. In the case of CIT v Kay Arr Enterprises & Others, the Madras HC in 2008 held that parties entering into a family arrangement do not attract capital gain as it was a prudent arrangement to avoid possible litigation among family members. A family arrangement has to be seen as an agreement between the members of the family for settling disputed family property and security of the family. A similar view has been taken in other cases, too.

    In the case of CIT v Sachin B Ambulkar, the Mumbai HC upheld that if there is no transfer of asset, the amount received by the tax payer as part of family arrangement does not gave rise to the liability of capital gain tax. In the case of Balachandra Bhatavedekar, the IT Appellate Tribunal, Mumbai, on 30 September 2010 held that the amount paid to the legal heirs of the deceased partner by the tax-payer firm was only on the ground of removing encumbrance and not on the basis of any legal sanctity. A similar payment of Rs 95 lakh made by the tax payer to Videocon Properties for settlement of suit was allowed as deduction by the assessing officer (AO) while computing the long- term capital gain as it was made for the betterment of the title of the property. The legal heirs of the deceased partner to whom the amount in question was paid were admittedly not the partners of the tax-paying firm. The CIT-Appeals held that the amount was paid to remove the encumbrance on the property for the betterment of the title. The claim of the tax payer for deduction of the amount while computing the long-term capital gain cannot be denied as it was not distribution of income of the tax-paying firm among the partners as alleged by the AO.

    Therefore, the Rs 30 lakh received by your sister will not be taxable in her hands. You can claim deduction for the amount paid to your sister though it is disputable. If you are claiming deduction for the amount paid to your sister, then you can avail 90% of the cost of acquisition only.

    What are the salient features of The Banning of Unregulated Deposit Scheme Bill, 2018?

    — Dindayal, e-mail

    A deposit-taking scheme is unregulated if it is not registered with the specified regulators. Deposit is defined as the amount of money received through an advance, loan or in any other form, with a promise to be returned with or without interest. Such deposit has to be returned either in cash or as a service. The time of return may or may not be specified.

    The Banning of Unregulated Deposit Scheme Bill, 2018, was passed by the Lok Sabha but could not be passed by the Rajya Sabha. As the parliament was not in session, an ordinance was issued by the President on 21 February 2019. The ordinance
    is a temporary law till it is approved by
    the legislature.

    The ordinance contains a clause banning deposit takers from promoting, operating, issuing advertisements or accepting deposits in any unregulated deposit scheme. The ordinance defines three different types of offences: running of unregulated deposit schemes, fraudulent default in regulated deposit schemes, and wrongful inducement to invest in unregulated deposit schemes by falsifying facts.

    The ordinance provides for severe punishment and heavy pecuniary fines to act as deterrent. There are adequate provisions for disgorgement or repayment of deposits gathered illegally. Properties and assets of those illegally collecting deposits can be attached by the competent authority and subsequent realization of assets for repayment to depositors after taking permission from the designated court. Clear-cut time lines have been provided for attachment of property and restitution to depositors.

    The ordinance enables creation of an online central database, for collection and sharing of information on deposit-taking activities in the country. Deposit-takers comprise all possible entities including individuals receiving or soliciting deposits, except specific entities such as those incorporated under an Act of parliament or state legislature. Banks are not included as deposit takers.

    The ordinance does not stop any entity from seeking funds for its business or individual from raising a quick loan from relatives to tide over a crisis. It does not ban small and medium enterprises from receiving loans in the course of or for the purpose of business. Section 10 of the ordinance provides that every deposit-taker who commences or carries on business as such on or after 21 February 2019 has to intimate to the prescribed authority in the prescribed form about its business.

    How are returns from mutual funds taxed? 

    — Padiyar, e-mail

    If 65% or more of the corpus is invested in equities, the mutual fund is treated as equity scheme for taxation. If the investment is redeemed within a year, returns are treated as short-term capital gains and taxed at 15%.

    Returns on equity mutual funds held for more than a year are treated as long-term capital gains. Gains exceeding Rs one lakh a year attract 10% tax without the benefit of indexation. Investment in equity mutual funds or shares before 31 January 2018 is grand-fathered. Gains will be exempt from tax.

    Dividends from equity mutual funds are tax-free in the hands of investors. Dividends are paid after deducting a dividend distribution tax (DDT) of 11.648% including surcharge and cess.

    Arbitrage mutual funds investing in arbitrage opportunities in the cash and derivative segments of the equity markets are treated as equity funds for taxation.

    Returns arising from sale or redemption of debt or non-equity funds within three years of holding are treated as short-term capital gains for taxation. Short-term capital gains are added to ones income and taxed according to the applicable income tax (IT) slab rate. If the holding period of debt fund investments is more than three years, returns are considered as long-term capital gains for taxation and taxed at 20% with indexation benefit. Indexation means adjustment of gains after taking inflation into consideration. Investment in a debt fund for over three years will attract taxes only if the returns are over the inflation-adjusted initial investment.

    Dividends from debt mutual funds are tax-free in the hands of the investor. However, dividend payouts from debt
    mutual funds are subjected to a dividend distribution tax of 29.12% including cess and surcharge.

    International funds investing in overseas stocks and fund of funds, i.e., schemes investing in different mutual funds are considered as debt funds for taxation. The tax rules that apply to debt funds are also applied to returns from international funds and fund of funds.

    Each individual systematic investment plan (SIP) is treated as a fresh investment. Gains are taxed separately. Gains from SIP are taxed as per the type of mutual fund and the holding period.

    Besides, securities transaction tax (STT) of 0.001% is levied by the fund house on sale of units of equity schemes. There is no STT on the sale of debt funds.

    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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