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Brother and sister relationship is considered one of the most sacred and precious relationships in Indian culture, where brothers often give various gifts and presents to their sisters on Rakshabandhan or other special occasions. Many times brothers want to gift a house, land, flat or other immovable property in the name of their sister so that their future can be secured. But, as soon as it comes to transfer of property, the biggest question that arises in the mind of the common man is whether such a huge property will come under the ambit of Income Tax if it is received from the brother or not? Generally, there is a fear in the minds of people that the government may levy heavy taxes on transfer of property. To overcome this financial and legal confusion, very clear and transparent rules have been made in the Income Tax Act, which is very important for every brother or sister to know so that any kind of legal trouble can be avoided in future.
Under Section 56(2)(x) of Income Tax, brothers and sisters are considered close relatives.
According to income tax rules and financial provisions, under Section 56(2)(x) of Income Tax, 1961 in India, the relationship between brother and sister has been categorized as ‘close relative’. Its biggest advantage is that if a brother gifts any immovable property or house to his sister without any monetary consideration i.e. without any transaction of money, then there is no tax on that gifted property at the time of receipt. That is, when the property is transferred to the sister’s name, then no tax liability is incurred by the tax department. This rule applies not only to immovable property but also to cash, shares or other valuable gifts provided they are legally transferred between siblings without any commercial deal. However, people often misunderstand that getting tax exemption means that this property will never be taxed in any form, whereas the rules are slightly different and technical.
When sister sells property in future, how will capital gains tax be calculated?
It is very important that even though no tax has to be paid immediately when a brother gifts a property to his sister, it does not mean that the property will remain completely tax free in future. If in the future the sister sells the gifted property or land to any other person, then the rules of Capital Gains Tax will be applicable on it. When the sister sells the property, an important rule comes into play while calculating the tax. While deducting capital gain, the cost of acquisition of the property for the sister will not be the price on which she received the gift, but will be based on the original price at which the brother himself purchased the property. Additionally, the time period for which the brother held the asset will also be added to determine whether it is short-term capital gain or long-term capital gain. Therefore, it is very important to preserve the old documents and purchase receipts purchased by the brother.
While gifting property, keep these important legal and paperwork in mind
Whenever a brother transfers any property in the name of his sister, mere verbal or family consent is not enough, but it is legally mandatory to keep all the documents in order. The first and foremost step is that a registered ‘Gift Deed’ must be made for the transfer of property and it must be duly registered. Without a registered gift deed, ownership of the property is not considered transferable in the eyes of law. Additionally, all documents related to the original purchase of the property by the brother, bank transaction documents and tax receipts should be preserved. The process of giving and receiving gifts should be completely transparent and care should be taken that no monetary payment is made in return. If the sister gives something very big or expensive to the brother in return, the Income Tax Department may consider it a commercial transaction rather than an ordinary gift, which can completely change the tax rules.
Which gifts received from close relatives are completely tax free?
Within the ambit of Indian Income Tax law, not only siblings, but all types of gifts received from select and close relatives of the family are completely tax free. According to the law, no tax is levied under the Income Tax Act on gifts received from spouse, property received from parents, parents’ brother or sister (i.e. uncle, aunt, maternal uncle, maternal aunt, etc.), own children and their spouses and gifts received from spouse’s parents i.e. in-laws. However, if any big property or valuable gift is received from any distant relative or friend outside the list of these relatives, then the entire gift becomes taxable if the total amount exceeds fifty thousand rupees. Therefore, this special legal provision given to the brother-sister relationship should be used properly and the property should be exchanged as per the rules, so that love remains in the family and the law can also be completely followed.