Can An Heir Donate Or Gift Inherited Property?

Yes, an heir can legally donate or gift inherited property to another person, but there are certain legal, procedural, and tax implications that must be considered when transferring ownership of inherited property.

1. Legal Rights of the Heir

Once an individual inherits property, they become the legal owner of the property. As the legal owner, the heir has the right to dispose of the property, including gifting or donating it to others.

The property can be transferred to another individual either as a gift or donation, provided the heir has full ownership rights and the property is free from any encumbrances (like debts or legal disputes).

2. Gift of Inherited Property

An heir can transfer inherited property through a gift deed. A gift deed is a legal document that transfers ownership of the property from the donor (the heir) to the recipient (the donee) without any exchange of money.

The Gift Deed must be voluntary, with no coercion or undue influence involved. The donor must be of sound mind and should voluntarily choose to gift the property to the recipient.

The Gift Deed must be executed on a stamp paper of the appropriate value, signed by the donor, and witnessed by at least two witnesses. It must then be registered with the Registrar under the Registration Act, 1908, if the property being transferred is immovable (real estate).

The gift is considered irrevocable once it is executed, unless fraud or coercion is involved.

3. Donation of Inherited Property

While the term donation often refers to charitable donations, a private individual can also donate their inherited property to a charitable organization. The procedure for donating property to a charity is similar to gifting, with the added step of ensuring that the recipient is a legally recognized charity, trust, or non-governmental organization (NGO).

The donor must execute a donation deed specifying the details of the property being donated, and this deed must also be registered.

4. Tax Implications

Gift Tax:

Under Indian tax laws, the donor is not required to pay any tax when gifting property to family members. However, the recipient (donee) may be subject to taxation depending on the value of the gift and their relationship to the donor.

If the value of the gift exceeds ₹50,000, the recipient is required to pay income tax on the fair market value of the property, unless the gift is received from a close relative (as defined by the Income Tax Act, such as parents, children, siblings, etc.), in which case the gift is exempt from tax.

If the property is sold by the recipient, they will be liable for capital gains tax based on the sale price and the cost of acquisition (using the fair market value at the time of inheritance).

Capital Gains Tax:

If the inherited property is gifted or sold by the heir, the recipient may face capital gains tax when the property is sold, based on the difference between the sale price and the cost of acquisition (the fair market value at the time of inheritance). If the property is held for more than two years, the tax rate is 20% with indexation benefits.

Wealth Tax:

As of April 1, 2015, wealth tax has been abolished in India, so there is no wealth tax liability on the gifted property, regardless of its value.

5. Transfer of Property Act (1882)

The Transfer of Property Act, 1882 governs the transfer of property in India, including the transfer of inherited property. Under this Act, the donation or gift of immovable property (like land or buildings) must be in writing and registered if the value is significant.

6. Procedure for Gifting or Donating Inherited Property

• Prepare the Gift Deed: A legal document that includes details of the property and the donor’s and donee's information.
• Pay Stamp Duty: Stamp duty must be paid according to the prevailing state rates for the gift deed.
• Sign and Register the Deed: The gift deed must be signed by the donor and witnesses, and it must be registered at the local sub-registrar’s office.
• Handover Possession: Once the deed is registered, the donor may hand over the possession of the property to the donee.

7. Example

• Example 1: Mr. X inherits a house from his father and decides to gift the house to his daughter, Ms. Y. Mr. X drafts a gift deed, gets it stamped, signed, and registered. Ms. Y does not have to pay tax on the gift since it is from a parent to a child.
• Example 2: Mrs. A inherits agricultural land from her deceased husband and gifts it to a registered charity for the construction of a school. The donation deed is executed, and the charitable organization receives the land. In this case, there is no tax liability on Mrs. A for the donation to a registered charity.

8. Restrictions on Gifting

An heir may face restrictions on gifting the property if it is subject to any legal disputes or encumbrances (like mortgages or loans). The property must be free from legal issues before gifting it to another person.

In the case of joint ownership of inherited property, the heir may need the consent of other co-owners before gifting or donating the property.

Conclusion:

An heir can donate or gift inherited property legally, subject to the proper execution of a gift deed, registration, and the payment of applicable stamp duty. While the donor does not face direct taxation, the recipient may have to pay tax if the property exceeds the specified value, except in cases of gifts from close relatives. Additionally, the recipient may face capital gains tax upon the sale of the gifted property. Therefore, careful legal and tax planning is important when transferring inherited property through gifts or donations.