I want to offer shares held by me for the past 5-10 years. Income tax rules explained
I want to offer some of the listed shares held by the last 5-10 years to my HUF who will sell them immediately. The HUF will then purchase a dwelling house, to be used as self-occupancy for the family, by investing the entire amount received from the sale of the shares. Will capital gains realized by HUF be exempt so I can circumvent the clubbing provisions?
Gifts received by an individual or a HUF should not be treated as income until the total of all gifts received during the year does not exceed fifty thousand rupees. Once the aggregate of all such gifts received over the years crosses the threshold of fifty thousand rupees, the total value of all gifts is treated as income with no basic exemption. However, gifts received from certain specified relatives should not be treated as income, regardless of the amount of such gifts.
All members of a HUF are covered by the definition of specified parents. So there is no HUF tax liability when you donate the shares you own to HUF. However, income generated by HUF will be subject to the clubbing provisions and income generated by the shares, whether capital gains or dividends, will be associated with your income.
With regard to the holding period for the calculation of the nature of capital gains in case of assets received as a gift or inheritance, the period during which the asset is held by the previous owner from the one who had paid for it should be included in calculating the holding period for the person selling that asset. Since the holding period in the hands of HUF will be longer than 12 months for these listed stocks, the profits made by HUF will be long-term capital gains. You will be entitled to grandfathering provisions for the calculation of long-term capital gains as the shares were purchased before January 31, 2018.
Since HUF is considering purchasing a dwelling house with all of the proceeds from the sale of the shares, HUF would be entitled to claim an exemption under Section 54 F from long-term capital gains. term realized on the sale of the shares. Whether or not HUF can claim the Section 54F exemption, due to the applicability of the clubbing provisions, is a matter of litigation, but various tax courts income deemed that the income to be clubbed would be the income calculated under the provisions of the Income Tax Act. Since capital gains income can only be calculated after giving effect to the available capital gains exemption, there is a good chance that you will win the case, even if the case is the subject of a dispute.
Since you plan to use the house for self occupancy of the house and there will be no income from the house, there will be no income bludgeoning as long as the house is used for self-occupation. Clubbing clauses will apply on rent as you let the property or on capital gains as you sell it in the future. The clubbing provisions will continue to apply even when an asset is converted into another asset.
Balwant Jain is a tax and investment expert and can be reached on [email protected] and @jainbalwant on Twitter