The Gift Has Changed Hands-But Has Its Tax History Also Changed?
Last week, I shared an interesting conversation over my morning cup of tea with a relative whose nephew was proposing to gift him an immovable property having a stamp-duty value of ₹1.65 crore. The gift was to be made through a registered gift deed, without any consideration. The property was originally purchased by the nephew in 1998. What made the conversation particularly interesting was that the uncle was not planning to keep the property for long. He intended to sell it within about a year of receiving the gift.
In the first part, we saw that the expression “Relative” has a very different meaning under the Income-tax law from what we ordinarily understand in family life. Although a nephew is certainly a relative in ordinary language, he is not included in the specified definition when he is the donor and the uncle is the recipient. Consequently, the ₹1.65 crore stamp-duty value could become taxable in the uncle’s hands under the gift provisions.
We also saw that the mere act of making a genuine gift does not, by itself, create income-tax liability in the hands of the nephew. But our tea-table discussion did not end there! The uncle then asked a seemingly simple question:
“If I sell the property within one year of receiving the gift, will my capital gain be short-term or long-term?”
At first glance, the answer appears obvious: it should be short-term. After all, he would have held the property for less than a year. But tax law, as we have already discovered, does not always stop at what appears obvious!
The nephew had purchased the property way back in 1998. So the next question naturally arose: Does the nephew’s long period of ownership also count in the hands of the uncle? And if it does, another important question follows.
If the uncle is taxed on ₹1.65 crore as the value of the gift, will that same ₹1.65 crore become his cost of acquisition when he sells the property? Or will he have to step into the shoes of the nephew and adopt the nephew’s old cost? And what about the fair market value as on 1 April 2001? Could that become relevant because the property was acquired in 1998? In other words, the gift may have changed hands—but has its tax history changed too? That takes us to the second and equally interesting part of the story-
What Happens When the Uncle Sells It?
The Gift Has a Memory!
When a capital asset is received by way of gift, the Income-tax law does not necessarily treat the recipient as starting with a completely fresh asset on the date of the gift. In certain respects, the tax history of the property travels with the property. Under the old as well as new Income-tax law, while determining the period for which a capital asset is held, the period for which it was held by the previous owner is also to be taken into account.
In the present case, the nephew acquired the property in 1998. Therefore, the holding period does not simply start afresh when the uncle receives the gift. So, even if the uncle sells the property within one year of receiving it, the gain can still be long-term capital gain, because the nephew’s earlier period of holding is also counted. The uncle may have owned the property for only a few months, but for tax purposes, the property carries a history going back to 1998!
And that brings us to the next question-which is perhaps even more interesting:
What exactly will be the uncle’s cost of acquisition?
Will it be the ₹1.65 crore value subjected to tax as a gift in the hands of the uncle, or will the old cost of the nephew come into the picture? And does the 1st April 2001 valuation have any role to play?
Let us open the next tax door.
Ordinarily, the gift provisions contain rules for determining the cost where the previous owner acquired the property before 1st April 2001. However, in the present case, if the property is actually subjected to tax under the special gift provision, the specific rule [corresponding to section 49(4)-now section 73(1), Table Sl. No. 17] becomes relevant, and the value subjected to tax under the gift provision becomes the cost for subsequent capital-gains purposes. Thus, if ₹1.65 crore is the amount subjected to tax, the broad position would be:
Taxable gift value: ₹1.65 crore,
Cost for subsequent capital gains: ₹1.65 crore
Period of holding: Includes the nephew’s period from 1998
Sale within one year by uncle: Can still result in LTCG.
But just when I thought the tax story had finally settled, another question came from an unexpected quarter. I received a call from a professional colleague after the first part of this column was published. He raised an interesting point: “You have said that a nephew is not a ‘relative’. But could he not be a lineal descendant?” That question made me revisit the family tree once again. What exactly is a “lineal descendant”? Can a nephew ever fall within that expression merely because a common grandfather is involved? And has the new Income-tax Act, 2025 finally settled the earlier controversy regarding the maternal side of the family?
The ₹1.65 crore property had already taken us from gifts to capital gains. Now, the family tree itself was demanding a closer look! And that is where our story continues in the next part of The TAX Talk.
[Views expressed are the personal views of the author. Readers are advised to seek professional advice before taking any decisions. Readers may forward their feedback & queries at nareshjakhotia@gmail.com. Other articles & response to queries are available at www.theTAXtalk.com]
