A gift deed is used to voluntarily transfer assets without consideration during the donor’s lifetime. A Will, on the other hand, is a legal declaration that outlines how a person’s assets should be distributed after their death. Here’s what you should know about the tax implications associated with both instruments and how much tax may be payable in each case.
Ramesh Mehta, a 68-year-old retiree, owns a house worth ₹2 crore. He wants to pass it on to his daughter, Neha. If he uses a gift deed, the house will be transferred to Neha immediately after the document is registered and accepted. However, Ramesh will have to pay stamp duty and registration charges. Once the gift is made, he will no longer be the legal owner.
If he chooses a will, the property will transfer to Neha only after his death. A Will can also be changed anytime while he is alive and does not require a stamp duty. However, he needs to keep in mind that in some cases, a will may be challenged by other heirs.
Gift deed versus will: Key legal differences
Typically, gift deeds are used to voluntarily transfer assets without consideration during the lifetime of the donor. Such gift deeds are effective immediately upon its acceptance and registration. It is necessary to note that the stamp duty on gift deeds is mandatorily required to be paid.
“On the other hand, Wills are legal declarations in nature and are effective for the distribution of assets only after the death of the testator. Unlike gift deeds, wills can be changed any time before the death of the testator, and most importantly, no stamp duty is required to be paid on it,” says Kunal Savani, Partner, Cyril Amarchand Mangaldas.
For the purpose of making a gift of immovable property, Section 123 of the Transfer of Property Act provides that the transfer must be effected by a registered instrument and attested by at least two witnesses.
“Stamp duty and registration charges would be payable depending on the state laws. Stamp duty may differ depending on the relationship with the donee and the nature of the property such as commercial or residential,” says Adhiraj Harish, Partner, D.M. Harish & Co.
Will or gift deed: The tax difference
*That said, from a taxation perspective, the said instruments have distinct implications, and therefore, understanding the differences between them is imperative for effective estate planning.
“For instance, while gifts made to “relatives” (the Income Tax Act, 1961 (IT Act) provides an exhaustive list of person(s) covered as ‘relative’ for such purposes) are exempt from taxation under Section 56(2)(x) of the IT Act, the gifts made to non-relatives are subject to tax if certain conditions are satisfied,” says Savani.
Also, property received through a Will is not taxed. Taxation arises only when the property is sold at a later date.
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Further, for the purposes of calculating the capital gains on the sale of assets received via gift or Will, the taxpayer shall consider the cost of acquisition and holding period of the original owner. “Subsequently, depending on the said period of holding, the capital gains shall be characterized as long-term or short-term capital gains, on which the taxpayer shall be subject to tax at applicable rates (plus surcharge and cess),” says Savani.
Avoiding heir disputes
One important factor to consider is that if an owner gifts his or her property, then they lose control over the property during his or her lifetime. They may therefore consider reserving a right to reside or inserting other similar conditions for their protection. Conditions may include retaining lifetime residence rights, receiving rental income, restricting sale or transfer, requiring maintenance support, or allowing the gift to revert if obligations fail.
“In the event the owner of a property expects a dispute from legal heirs surrounding his estate and has a fear that his will may be challenged, then in such event he may consider transferring the property by way of a gift instead of by a will,” says Harish.
Anagh Pal is a personal finance expert who writes on real estate, tax, insurance, mutual funds and other topics