Gift Deed vs. Sale Deed: Which Saves More Tax in India?

In India, property transfers occur through various legal instruments, with Gift Deed and Sale Deed being the two most commonly used methods. A Gift Deed facilitates the transfer of property ownership without any monetary consideration, usually between family members or close relations. In contrast, a Sale Deed involves a transaction where the buyer pays a specified amount to the seller in exchange for property ownership.

The choice between a Gift Deed vs. Sale Deed has significant tax implications, including stamp duty, income tax, and capital gains tax. 

Understanding Gift Deed and Sale Deed

A Gift Deed is a legal document that allows a property owner (donor) to voluntarily transfer ownership of immovable property to another person (donee) without any financial consideration. It is commonly used for transfers between family members, ensuring that the process is legally binding and irrevocable once executed and registered.

On the other hand, a Sale Deed is a document that records the transfer of property ownership in exchange for a monetary payment. The sale of property through a Sale Deed involves financial transactions, making it a commercial deal rather than a gratuitous transfer.

Both of these deeds are legally valid methods for property transfer. However, if comparing Gift Deed vs. Sale Deed, the tax implications of each vary significantly, making it crucial to assess their impact before proceeding with a transaction.

Tax Implications of Gift Deed

When transferring property through a Gift Deed, several tax considerations come into play:

1. Stamp Duty and Registration Charges:

• • Stamp duty on a Gift Deed varies from state to state but is generally lower when the property is gifted to a close relative (such as parents, children, siblings, or spouses).
  • Some states offer concessions for transfers between specified relatives, while others charge standard stamp duty rates.
  • For example, in Maharashtra, a Gift Deed executed in favor of a family member attracts a nominal stamp duty of ₹200, plus applicable metro cess.

2. Income Tax on Gifted Property:

• • Under Section 56(2)(vii) of the Income Tax Act, 1961, a gift of immovable property is exempt from income tax if received from a specified relative.
  • However, if the property is gifted to a non-relative and its market value exceeds ₹50,000, the recipient must pay tax on the entire value as “income from other sources.”

3. Capital Gains Tax:

• • The donor does not incur capital gains tax when gifting a property.
  • However, if the donee later sells the property, capital gains tax will apply based on the original purchase price paid by the donor.
  • The donee’s holding period includes the period for which the donor held the property, which can be beneficial for availing long-term capital gains tax benefits.

A Gift Deed vs. Sale Deed comparison highlights that gifting property to relatives can help reduce immediate tax liabilities but may lead to tax obligations in the future when the recipient sells the property.

Tax Implications of Sale Deed

When transferring property through a Sale Deed, the following tax liabilities arise:

1. Stamp Duty and Registration Charges:

• • Stamp duty for a Sale Deed is generally higher than that for a Gift Deed because it is based on the property’s market value.
  • Rates vary across states. For example, in Maharashtra, stamp duty for a Sale Deed is typically 6% for men and 5% for women (including a 1% metro cess) within municipal areas.

2. Capital Gains Tax for the Seller:

• • The seller is liable to pay capital gains tax on the profit earned from selling the property.
  • If the property is held for less than 36 months, short-term capital gains tax (as per the seller’s income tax slab) applies.
  • If the property is held for more than 36 months, long-term capital gains tax applies, which is currently 20% with indexation benefits.

3. Income Tax for Buyer:

• • The buyer does not incur any income tax liability on purchasing the property through a Sale Deed.
  • However, under Section 194-IA of the Income Tax Act, if the transaction value exceeds ₹50 lakh, the buyer must deduct 1% TDS (Tax Deducted at Source) and deposit it with the government.

A Gift Deed vs. Sale Deed analysis shows that while a Sale Deed leads to immediate capital gains tax for the seller, it provides the buyer with a clear cost basis for future tax calculations, unlike a Gift Deed, where capital gains tax is deferred to the donee.

Comparative Analysis: Gift Deed vs. Sale Deed

When assessing Gift Deed vs. Sale Deed from a tax-saving perspective, the following key differences emerge:

From a tax-saving standpoint, Gift Deed is more beneficial when transferring property within the family, as it minimizes stamp duty and defers capital gains tax. However, a Sale Deed provides immediate liquidity to the seller and a clear purchase cost for the buyer.

Conclusion

When deciding between a Gift Deed vs. Sale Deed, the choice largely depends on the purpose of the transfer and the tax implications for both the giver and the recipient. A Gift Deed is a favorable option when transferring property within close family members, as it often attracts lower stamp duty and provides income tax exemptions when received from specified relatives. However, the future tax burden shifts to the donee, who will be liable for capital gains tax when they eventually sell the property. This makes a Gift Deed an efficient tax-saving tool for immediate transfers but requires careful planning for long-term financial implications.

A Sale Deed, on the other hand, is more suitable when property transfer involves financial consideration. While it ensures an immediate transaction with a well-defined purchase price, it also leads to higher stamp duty and an immediate capital gains tax liability for the seller. The buyer, however, benefits from a clear cost basis, reducing future tax complications upon resale. Ultimately, choosing between a Gift Deed vs. Sale Deed should be based on a thorough assessment of present and future tax liabilities, state-wise stamp duty regulations, and individual financial goals. Consulting a tax and legal expert can help structure the transfer efficiently while ensuring compliance with applicable laws.

Frequently Asked Questions (FAQs)

1. Which is more tax-efficient: Gift Deed vs. Sale Deed?

A Gift Deed is more tax-efficient when transferring property between specified relatives, as it attracts lower stamp duty and is exempt from income tax. However, the donee will be liable for capital gains tax when they sell the property. A Sale Deed, while ensuring immediate liquidity, results in higher stamp duty and an immediate capital gains tax liability for the seller.

2. Does a Gift Deed require payment of stamp duty?

Yes, a Gift Deed requires stamp duty, but the rate is usually lower when the property is transferred to a specified relative. The exact percentage varies by state, with some states charging a nominal fee for family transfers.

3. Is capital gains tax applicable on a Gift Deed?

No, capital gains tax is not applicable when property is gifted. However, if the donee (recipient) sells the property in the future, they will be liable for capital gains tax, which is calculated based on the original purchase price and holding period of the donor.

4. Can a Gift Deed be revoked or challenged?

A Gift Deed is generally irrevocable once executed and registered. However, it can be challenged in court on grounds of coercion, fraud, undue influence, or lack of proper execution under applicable laws.

5. Who bears the tax liability in a Sale Deed transaction?

In a Sale Deed, the seller is liable to pay capital gains tax on any profit earned from the transaction. The buyer, if purchasing property worth over ₹50 lakh, must deduct 1% TDS under Section 194-IA of the Income Tax Act before making payment to the seller.