Let’s Decode The Tax Mysteries of Bullion Gifts. Minimize Capital Gain Tax on Bullion Gold sold.
Many times our parents or relatives gift us Bullion(Gold Bars). This is a very common practice I have seen where most think that since Gift from relative is exempt from tax then the final sale will also not attract any tax liability. While there are many who directly reduce the cost from sale amount without considering the inflation value to arrive at the Capital Gain on Gold. I heard similar cases several times and I thought it would be beneficial to explain one of my case studies that would solve your capital gain tax query on sale of Bullion(Gold Bars)
My client (Ranvir) received a Bullion (Gold Bar) from his mother as a gift without adequate consideration in 2003, which she had purchased for Rs.60,000 in 2003 and Ranvir sold it in 2023 for Rs.6,00,000.
So, there are 3 situations here that need understanding,
-Whether gift given by the mother to the son is taxable in the hands of the mother under capital gains in 2003(date of gift) or under clubbing provisions 2023(date of sale)?
-Whether the gift received from his mother is taxed in Ranvir’s hands in 2003?
-Is Ranvir liable to pay Tax on Gold Bullion sold in 2023 under “Income from Other Sources” or “Capital Gains”?
According to Ranvir, taxation should be Rs.6,00,000-60,000=540000. So, tax liability will be 20% of 540000=108000/- in 2023.
Is this true?
He got confused regarding the taxation,
-Whether clubbing provisions apply and are taxed in Mother’s hands?
-Will it be taxed at the time of gifting or finally selling Bullion (Gold Bars)?
-Whether it will be taxed under Capital Gains or Income from other sources?
Let’s understand the tax liability for each of them in 2003 & 2023,
Situation 1: Taxability in the hands of his mother
In 2003
Is the gift given by the mother to Ranvir in 2003 taxable in her hands?
Transfer– Sale, Exchange, or Relinquishment is regarded as transfer with some exceptions such as gift.
A gift by the mother is not treated as a transfer. So not taxable in her hands at the time of gifting in 2003.
In 2023
Will Capital Gains on the final sale be taxable in the hands of the mother?
Capital Gains will be taxable in the mother’s hands only if she had transferred Bullion with an agreement/understanding, to receive the Capital Gains funds in her account at the time of sale.
But, in this case, it was an absolute unconditional gift without any consideration, without any retransfer or credit of funds back into the mother’s bank account. Clubbing provisions of being taxed in the hands of transferor of Gift don’t apply in this case.
Hence, will not be taxed in the hands of the mother in 2023 at the time of the sale of Bullion.
Situation 2: Taxability in the hands of Ranvir.
In 2003
As seen earlier, the Gift is not a transfer and not taxable in the hands of the mother under capital gains at the time of transfer as a gift in 2003.
So, what about the Gift of bullion received by Ranvir in 2003 from his mother?
Gift of Bullion (one among 8 specified assets) at the time of transfer is taxable in the hands of the recipient if transferred without consideration, and if Fair Market Value(Government Value) is greater than Rs.50,000/- under Income from Other Sources. Therefore, in the present situation, FMV((Government Value) of bullion in 2003=Rs.60,000/- would be taxable in the hands of Ranvir, since FMV=Rs.60,00 is greater than Rs.50,000/- and the entire Rs.60,000 should have been taxed in the hands of Ranvir.
Exceptions,
A gift from a relative or on marriage is an exception to the above rule and hence not taxed in the hands of Ranvir at the time of receipt of the Gift from the mother(relative) under Income from other sources in 2003.
Hence, not taxable in hands of Ranvir in 2003.
In 2023
Capital Asset– Capital Asset is any asset other than Business stock in trade, or personal movable assets such as home furniture, or clothes whose value depreciates over time, etc..
Neither mother nor Ranvir is trading in Bullion. So, it’s not their stock but held as Investments over a long period.
Yes, Bullion is a Capital Asset, that appreciates over time and is not covered by any exceptions.
Long-Term Capital Asset– More than 36Months holding
Current Money Value of Bullion- Cost Inflation Index-How much are we spending more to acquire the same Bullion (Gold Bar) today-Indexation will apply. His mother had purchased Bullion in 2003 when the value was Rs.60,000, but today’s value is Rs.1,91,550/- after indexation.
Also since it is held for more than 36 months from 2003 to 2023, the period held by the mother is also included. Hence, it is a long-term capital asset in the hands of Ranvir.
Transfer– Sale, Exchange, or Relinquishment is regarded as transfer.
The final sale of Bullion is regarded as a transfer. Hence, taxable in the hands of Ranvir in 2023, when sold finally.
Will it be taxed under Income from Other sources or Capital Gains in the hands of Ranvir?
If an income is not taxed under any other head of income like Salaries, House Property, Capital Gains, Business & and Profession, then it is taxed under Income from Other Sources.
But in this case, Bullion transferred is a Long-Term Capital Asset. Hence taxable as Capital Gains.
Calculations
Period of Holding-2003 to 2023
Sale Value- 6,00,000
Cost of Acquisition-60,000
Today’s Value: Indexed Cost of Acquisition= 1,91,550/-(from 2003-04= 109 to 2023-24=348)
Long Term Capital Gains (2023) in hands of Ranvir= Sale Value Less: Indexed Cost of Acquisition= 6,00,000-191550=4,08,450/-
Tax Payable @ Flat 20% * 408450=Rs. 81690+4% (Education Cess & Secondary & Higher Education Cess)
Ranvir is completely relaxed as Capital Gain Tax @20% is not on (600000-60000=540000) but on only Rs.4,08,450/-
Ranvir is liable to pay Long Term Capital Gain Tax of Rs.81,690 on the sale of this Bullion.
Conclusion
A gift from a relative of Bullion (Gold Bar) is not taxed at the time of gifting but is taxed at the time of final sale under Capital Gains in the hands of the seller of Bullion.