All Income Earned By Minor Beyond Rs 1,500 Will Be Added To Parent’s Income

What is the tax liability in respect of a flat gifted to daughter by her father and which is let out? My understanding is that the gift will not be taxable as it is from a relative, but the rental income should be taxable. Is this correct? If the rental income is clubbed in the hands of the father, what would be the treatment of capital gains at the time of sale when the father is still alive?

Answer: Yes. Your understanding about taxability of the gift transaction at the time of gift of the house is correct. Gifts from specified relatives, including father, are not treated as income under Section 56(2) of the Income-tax Act, 1961, so there is no tax implication at the time of making the gift of the house. 

The rental income will, however, become taxable in the hands of the daughter, presuming she is a major. In case the daughter is a minor, not only the rental income and capital gains on sale of the house, but also all her income beyond Rs. 1,500 will be included in the hands of the parent with higher income as long as she remains a minor. Once she attains majority, the clubbing provisions will cease to apply.

Is indexation available on fixed maturity plan (FMP) mutual fund?

Answer: Yes, indexation is generally available on any capital asset, which is a long-term capital asset, except for a few capital assets, such as listed shares and equity-oriented schemes on which securities transaction tax (STT) has been paid. 

An asset becomes long term if held for the period prescribed for that asset to become a long term capital asset. FMPs will become long term capital asset and are entitled for indexation benefits if held for more than 36 months.

What is the taxability of the profits on shares allotted under initial public offering (IPO) and sold on the day of listings? Is it speculative or capital gain? Is it possible to claim deduction under Section 87A of the Income-tax Act, 1961?

Answer: The exact answer depends on facts of the case. The profits on sale of IPO shares can either be treated as business income or capital gain depending on the volume and funds arranged, but they certainly cannot be treated as speculation. 

Since the shares are sold within a short time, it is possible to claim rebate under Section 87A of the Income-tax Act, 1961 against tax liability whether the profits are treated as business income or capital gains. 

In case the shares are sold after 12 months from the date of allotment, the profits are treated as long-term capital gains on which rebate under Section 87 A cannot be claimed. 

The author is a tax and investment expert

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