Property Transfer Through Gift and Will: Decoding the Latest Rules

The Indian Income-tax Act, 1961, defines "Capital Asset" under Section 2(14) and governs the taxation of gains arising from the transfer of such assets under Section 45. Generally, profits and gains from the transfer of capital assets are charged as income under the head "Capital Gains" in the financial year in which the transfer occurs. However, certain transfers are excluded from this definition under Section 47, which outlines specific instances where a transfer is not considered a "transfer" for tax purposes.?

The Finance (No.2) Act 2024 proposes significant amendments to these provisions, particularly concerning the transfer of property under a gift, will, or irrevocable trust. The amended provision shall be applicable for the transfer affected in the financial year 2024-25.

Existing Provisions: Clause (iii) of Section 47

Before the proposed amendment, Clause (iii) of Section 47 of the Income-tax, a? transfer of a capital asset under a gift or will or an irrevocable trust was not regarded as “ Transfer”, except where such capital asset is a shares or? debentures, or warrants which are allotted by a company to its employees (directly or indirectly) under any Employees' Stock Option Plan or Scheme of the company offered to such employees in accordance with the guidelines issued by the Central Government in this regard.

Proposed Amendment: Clause (iii) of Section 47 (Effective 01/04/2025)

The Finance (No.2)? Act,? 2024 has substituted Clause (iii)? of section 47 with the following:

"Any transfer of a capital asset by an individual or a Hindu Undivided Family, under a gift or will or an irrevocable trust:"

This amendment narrows the scope of exemption to transfers made by individuals or Hindu Undivided Families (HUFs) only from the assessment year 2025-26. Previously, the clause did not specify the types of transferors, which could include entities beyond individuals and HUFs.

Key Implications of the Amendment

1. Restriction to Individuals and HUFs: The proposed change explicitly limits the exemption to transfers by individuals and HUFs. This suggests that any transfers of capital assets by other entities, such as companies, partnerships, or trusts, under a gift or irrevocable trust, will no longer be covered under the exemption. Consequently, such transfers may be subjected to capital gains tax.
2. Clarification on ESOPs: The specific exclusion for shares, debentures, or warrants allotted under Employee Stock Option Plans (ESOPs) remains unaffected. The provision ensures that transfers of these specific securities under a gift or irrevocable trust are still not exempt from capital gains tax if transferred to employees.
3. Administrative Clarity: The amendment provides clearer guidelines on the types of transfers exempted under the law, reducing ambiguity and potential disputes with tax authorities.

Conclusion

The Finance Bill 2024 introduces a significant change to the tax treatment of property transfers under gifts and wills. By restricting the exemption to transfers by individuals and HUFs, the amendment aims to clarify the scope of tax exemptions and ensure that certain transfers do not escape taxation. Taxpayers, particularly those involved in estate planning, should review their strategies in light of these changes to optimize their tax liabilities. As always, consulting with a tax professional is advisable to understand the full implications of these amendments and make informed decisions.

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