Is Painting Gifted By Father~in~ Law Taxable On Its Sale ?

Sir, my father in law is a renowned painter and he gifted me some painting at the time of my marriage around 9 years back.. though no paper work for the same was done for the same at that time… though he is still alive and can give me the same in writing. This year in Jan one of the painting was sold in a auction .. I want to invest the same in a house by investing the same in capital gain account ….please guide me am I allowed for the deduction and how to go about it ? Anvita , Shimla

Alas , if the auction of the painting would have taken place before 1/4/2007, there would not have any tax because the paintings were not defined as “capital asset ” as such was out of capital gains tax.

But from FY 2007-08, an amendment was brought in definition of “capital asset” given u/s 2(14) of the I T Act to include paintings and drawings . Therefore , the painting made by your father-in-law will now be liable to tax on capital gains on its sale.Since the paintings are more than 3 years old , the gain on sale of it is long term capital gains chargeable @ 20% .

You will have the following two options for saving tax on long term capital gains:

1. Buy a residential house to claim exemption u/s 54F.
2. Buy bonds-NHAI or REC- or any other specified for Section 54EC within six months from sale of paintings. [Right now there is none is the market]

Read more about this here.

You can also take benefit of the scheme of Capital Gains Account Scheme . Read this answer to know more about this Scheme

Complexity in the offing if you are daughter-in-law!

[Son-in-law should ignore the issues described below!]

The painting is gifted by your father-in-law to you. You should know that Income Tax Act considers this type of transfer as diversion of income . Therefore , there is a provision of “clubbing of income ” under section 64 of the I T Act . The clause (vi) of section 64(1) states as under

64. (1) In computing the total income of any individual, there shall be included all such income as arises directly or indirectly

………………………………

(vi) to the sons wife, of such individual, from assets transferred directly or indirectly on or after the 1st day of June, 1973, to the sons wife by such individual otherwise than for adequate consideration;

What the aforesaid clause says is that if father-in-law transfer an asset to his daughter-in-law without adequate consideration, income from such an asset shall be added to the income of the father -in-law .

In your case, there is certainly a chance that I T department will raise the issue of clubbing .I would suggest following ways :

• lLet it be taxed under your father-in-law’s hand . Let him avail of the exemption u/s 54EC or 54F as the case may be . The said property should be transferred to your name , if he wants to give gift, after three years. But remember , if you sale that property during his life time, again the clubbing provision will come into play.
• If he gifts to his son, clubbing provision does not affect such transfer. Even in that case , he should transfer only after three years from date of purchase of residential house or bonds.
• He can again invest in REC or NHAI bonds which he can transfer after three years to you, and you invest full amount in tax free instruments , like PPF,Shares so that any income generated is also tax free . If that be the case , there will not be any clubbing.

Last word!

If you are ready to fight a long drawn battle with I T department , go ahead and claim income as yours and exemption in your name.