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

Q. Sir, my father in law gifted me some painting around 7 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 exemption and how to go about it ?

Ans. If the auction of the painting had taken place before 1/4/2007, there would not have had 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 gift of painting made by your father-in-law to you 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 to tax @ 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 of NHAI or any other specified for Section 54 EC within six months from sale of paintings.

You can also take benefit of the scheme of Capital Gains Account Scheme.

Clubbing of income if you are daughter-in-law!

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.
Thus any income from such painting shall be clubbed with the income of the father in law.

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 :

1. Let 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 sell that property during his life time, again the clubbing provision will come into play.

2. 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.

3. He can again invest in 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. In such a case there will be no clubbing of income.

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