Amendment of Section 47 of Income tax Act about exempted transfer for the purpose of capital gains. Only gifts by individual and HUF will be exempt. Suitable changes in nomination Form or separate declaration is desired to avoid disputes in future.

[DEVKUMAR KOTHARI]

Amendment of Section 47  of Income tax Act  about exempted transfer for the purpose of capital gains. Only gifts by individual and HUF will be exempt.  Suitable changes in nomination Form or separate declaration is desired to avoid disputes in future.

Existing provision relevant operative portion of provisions:

Transactions not regarded as transfer.

47. Nothing contained in section 45 shall apply to the following transfers :-

xxx

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

Provided that this clause shall not apply to transfer under a gift or an irrevocable trust of a capital asset being shares, debentures or warrants allotted by a company directly or indirectly to its employees under any Employees' Stock Option Plan or Scheme of the company offered to such employees in accordance with the guidelines issued by the Central Government in this behalf.

As per existing provision the clause (iii) can be applied to transfer by anyone (except under specified  ESOP ) as per proviso. In fact the proviso carves out an exception, except that all transfers can fall under exempted category if it is under a gift , irrevocable trust or will. Transferor can be any person like a company, firm , AOP ,BOI of any kind.

 Will_ regarding, will as per knowledge of the author a will can be made only by a living individual and not by any other person.

Even HUF or Karta of HUF cannot make a valid will in respect to property of HUF or share of Karta or any coparcener. .

Though a Karta of HUF can express his desires in his will or a separate document expressing his desires about assets of HUF but it will not be in nature of will of HUF. It can be regarded as a policy statement for family which may be followed by successor Karta and members of HUF , after demise of present Karta of  HUF who makes such declaration of his desires.

Therefore, as per existing provisions gift given by anyone as gift or by way of irrevocable trust is exempt so far capital gains taxable u.s. 45  is concerned. Exception is only about ESOP as provided in the Proviso to the above clause.

After amendment:

After amendment, the clause shall read as follows:

47. Nothing contained in section 45 shall apply to the following transfers:-

“(iii) any transfer of a capital asset by an individual or a Hindu undivided family, under a gift or will or an irrevocable trust;”.

As per amended provision, gifts made   only by  individuals and HUF will not be considered transfer for the purpose of S.45 that is taxable  ‘capital gains’. The transfer can be under a gift or  will or irrevocable trust.

Nomination is also a way or form of gift, which take effect on death of the nominator.

However, in case of nomination for capital assets ( e.g. shares, units of MF, securities, other properties)  to which section 45 apply, dispute can arise as to whether, a transfer under  nomination is a transfer under a gift, or will or an irrevocable trust, which take effect on death of the nominator?

To avoid such dispute, a  suitable written declaration of gift   can also  be made to the effect that in case of nominations, the property received by nominee  will be a  gift from the nominator to the nominee and  such  declaration for gift which take place  after death of nominator should also be accepted by nominee to meet requirements about gift.

Otherwise, disputes can arise that the transfer made, as per nomination is a transfer of capital asset and is taxable under section 45.

There is a need to think about suitable changes in nomination form to incorporate such a clause to avoid disputes in future. Otherwise , a separate declaration of gift  to nominee can be made.

The clause  in the Finance (No. 2) Bill, 2024 and notes thereon is reproduced below with highlights added:

Amendment of section 47.

19. In section 47 of the Income-tax Act, for clause (iii), the following clause shall be substituted with effect from the 1st  day of April, 2025, namely:––

“(iii) any transfer of a capital asset by an individual or a Hindu undivided family, under a gift or will or an irrevocable trust;”.

 Notes on Clause: 

Clause 19 of the Bill seeks to amend section 47 of the Income-tax Act relating to transactions not regarded as transfer.

The provisions of clause (iii) of the said section provide that any transfer of a capital asset, under a gift or will or an irrevocable trust shall not be regarded as a transfer. The proviso to the said clause makes an exception to the clause in respect of specified Employees’ Stock Option Plan or Scheme of a company.

It is proposed to substitute the said clause so as to provide that nothing contained in section 45 shall apply to any transfer of a capital asset by an individual or a Hindu undivided family under a gift or will or an irrevocable trust.

This amendment will take effect from 1st April, 2025 and will, accordingly, apply to assessment year 2025-2026 and subsequent years.