A Tale Of Gifts Between Mother & Daughter!

My daughter was holding one plot of 9000 sq. ft bought in 1995 and in 2007 she has gifted this plot to her mother by way of settlement deed.My question is can her mother sell this plot under long term capital gain tax and if she reinvest this amount for new residential flat (she is already holding one flat in her name) what will be the tax liability. And can she again gift the new flat to her daughter.Surendar Lachhmandas , Chennai

You have asked two questions:

1. Whether exemption for reinvestment of the proceeds of sale of the plot is allowable in hands of mother who got he gift of plot from her daughter?
2. Whether the new residential flat purchased out of sale proceeds of plot can be gifted to daughter?

Answer to first question is YES. The cost of acquisition to your daughter will be the cost of acquisition of mother and the asset will be long term capital asset.Section 49 of the I T Act has express provison regarding such transfer . The said section provides regarding cost of acquisition in case of transfer of capital asset by GIFT. The exact wording s are :

49. (1)] Where the capital asset became the property of the assessee

(i) …

(ii) under a gift or will;

the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be.

Therefore,  if the plot of land is sold , the resultant gain will be long term capital gains  and computation of such gain will be made by indexing  the cost of acquisition in the hands of donee ( the daughter) . Since the gain is long term , mother will be eligible for claiming relief under section 54 F of the I T Act.

As far as second question regarding gifting the new residential house to daughter is concerned, subsection 3 of section 54F provides as under:

54(3) Where the new asset is transferred within a period of three years from the date of its purchase or, as the case may be, its construction, the amount of capital gain arising from the transfer of the original asset not charged under section 45 on the basis of the cost of such new asset as provided in clause (a) or, as the case may be, clause (b), of sub-section (1) shall be deemed to be income chargeable under the head Capital gains relating to long-term capital assets of the previous year in which such new asset is transferred.

In simple terms , if the mother gifts the new residential property within 3 years of purchase , the amount of capital gain not charged to tax on account of section 54F will be capital gain in the year in which such transfer of new house takes place. So, take decision accordingly!