Will exemption claimed on reinvestment in property be withdrawn if the property is gifted to the children?

Here is a query from one of our clients. His father-in-law sold a flat and reinvested the money in another flat in December 2017 and claimed tax exemption u/s 54 of the IT Act. He wants to know will the tax exemption claimed u/s 54 be withdrawn if he decides to gift the property to his daughter.

(Just to tell our readers – one of the conditions for availing the tax exemption benefit u/s 54 is that the taxpayer must not transfer the new house within a period of three years from the date of its purchase)

The section reads as under –

Transactions not regarded as transfer.

  1. Nothing contained in section 45shall apply to the following transfers :—

 (i)  any distribution of capital assets on the total or partial partition of a Hindu undivided family;

(ii)  [***]

(iii) any transfer of a capital asset under a gift or will or an irrevocable trust

Gift is not considered as Transfer under section 47 of IT Act. Hence, if the property is gifted by father-in-law to his daughter, he will continue to get the tax exemption benefit. However, the period of holding, between both of them, should be three years. This means, after the gift, if the daughter sells the property on or before completing three years from the date of reinvestment, they will lose the tax exemption.

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About B E Kumar Prasad

B E Kumar Prasad
He is a Practicing Chartered Accountant in Bengaluru, India. He has 25+ years of experience in income tax, business setup, and NRI matters. He is also an Insolvency Professional and Registered Valuer (F&SA).Prasad welcomes your comments and questions. Please email him at [email protected]

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