Income tax - Cpital Gain - Tax Planning

This query is : Resolved

Ca Subhash Kumar (Querist)
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27 October 2009 "One Big land with a small Building." The assets is long term capital assets

The asseese wants to sale it.
One Way -
1. The asseese sale the land & give the proceeds to two successors
2nd way -
1. The asseese gift the land to two succeesos & the receipient should sale it

Which one the right way?

what would be the tax planning in this situation?

Regards
Ca Subhash singh

CA KIRAN KANANI

CA KIRAN KANANI (Expert)
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28 October 2009 The second option is always advisable.
The sucessors can take the benifits of Sec.54/54F/54EC to the tune of Rs.50lacs each.
This suggestion is with the presumption that he is willing to reinvest - no in his name but in the names of his two sucessors.
The only drawback is that the sucessors will not get the benifit of indexation, which may not carry substantial amount of deduction since the land is very old capital asset.CA Kiran KAnani 9822049321

UMA SHANKER SHARDA

UMA SHANKER SHARDA (Expert)
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14 November 2009 What will the cost price in the hand of successors, if second option is excercised. If the cost price of the donor shall be considered and benefit of indexation is not possible then tax liabiltiy shall be very high.

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Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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31 July 2024 When dealing with the sale or gift of long-term capital assets like land with a small building, the tax implications can vary depending on whether the asset is sold directly or gifted to successors. Here’s a detailed comparison and tax planning advice for both scenarios:

### **Scenario Analysis**

#### **1. Sale by the Assessee**

- **Cost Price & Indexation:**
- The cost price for calculating capital gains will be the original cost of acquisition. If the asset is a long-term capital asset, indexation benefits (adjustment for inflation) are available.
- **Indexation Benefits:** This adjustment helps reduce the capital gains tax liability by considering inflation over the holding period.

- **Capital Gains Calculation:**
- **Long-Term Capital Gain (LTCG) Calculation:**
- **Sale Price** - **Indexed Cost of Acquisition** = **Long-Term Capital Gain**
- **Tax Rate:** LTCG on land and building is taxed at 20% with indexation benefits.

- **Tax Planning Tips:**
- **Invest in Residential Property:** Under Section 54, investing the capital gains in a residential property can provide exemption from capital gains tax.
- **Invest in Bonds:** Under Section 54EC, investing in specified bonds can also offer relief from capital gains tax.

#### **2. Gift to Successors**

- **Cost Price & Indexation:**
- **Cost Price for Successors:** The cost of acquisition for the successors will be the cost price of the asset in the hands of the donor (no indexation for successors).
- **Indexation Benefits:** Successors do not benefit from indexation, leading to potentially higher capital gains tax when they eventually sell the asset.

- **Capital Gains Calculation for Successors:**
- **Sale Price** - **Original Cost Price (of the donor)** = **Capital Gain**
- **Tax Rate:** Successors will be taxed at the same rate applicable to LTCG (20% without indexation).

- **Tax Planning Tips:**
- **Gift to Relatives:** Gifts to close relatives may not incur immediate tax implications, but the successor will inherit the asset with the donor’s cost price.
- **Future Sale by Successors:** Successors will have to pay capital gains tax based on the donor’s original cost price and without indexation.

### **Comparison and Recommendation**

**1. **Sale by the Assessee:**
- **Pros:**
- **Indexation Benefits:** Reduces capital gains tax liability.
- **Exemption Opportunities:** Potential exemptions under Sections 54 and 54EC.
- **Cons:**
- **Immediate Tax Implication:** Assessee will incur capital gains tax on the sale.

**2. **Gift to Successors:**
- **Pros:**
- **No Immediate Tax:** No immediate capital gains tax on the gift itself.
- **Cons:**
- **Higher Future Tax Liability:** Successors will face higher capital gains tax due to lack of indexation and higher cost price (of the donor).

### **Best Approach**

- **If Immediate Tax Liability is a Concern:** It may be beneficial for the assessee to sell the asset themselves, benefit from indexation, and utilize available exemptions to minimize tax liability.
- **If the Assessee Prefers to Transfer the Asset:** Gifting the asset may be considered, but successors should be aware of the higher future tax liability due to the donor’s cost price.

### **Tax Planning Strategies:**

1. **Utilize Exemptions:**
- Invest in residential property (Section 54) or specified bonds (Section 54EC) to reduce capital gains tax.

2. **Evaluate Holding Period:**
- Consider holding the asset longer if market conditions and personal financial situation permit to benefit from possible appreciation.

3. **Consult a Tax Professional:**
- For personalized advice, a tax professional can help in making an informed decision based on current laws and individual circumstances.

In summary, the choice between selling or gifting depends on immediate vs. future tax implications. Selling allows the assessee to utilize indexation benefits and potential exemptions, whereas gifting transfers the future tax burden to successors.