#ltcg

Debt funds have historically offered tax-efficient investing benefits through Long-Term Capital Gains (LTCG) taxation with indexation after a holding period of 3+ years. This approach helped investors reduce taxable gains by adjusting purchase costs for inflation, making debt mutual funds an important consideration for long-term financial planning and portfolio diversification.

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Legally, the spouse who gets the gift may become the owner of the property. However, for tax reasons, LTCG is still considered income for the original owner.

Arjun Mehta, a 42-year-old salaried worker from Mumbai, gave his wife Kavya Mehta, 39, a house without asking for money. Kavya became the legal owner and later sold the property for a profit, but the long-term capital gains (LTCG) were not taxed on her.

According to Section 64(1)(iv) of the revenue-tax Act, revenue from assets given to a spouse without enough payment is added to the income of the person who gave them. So, even though Kavya sold the property, the LTCG was taxed in Arjun's name.

Arjun kept a fully signed gift deed and clear records to avoid problems. The tax officer asked a question at first because the dates on the gift deed and property registration were a little different.

This is how income from property given to one spouse by another is taxed under clubbing rules. It also explains why precise paperwork and following the rules are important to avoid arguments and make sure the right person reports the income.

Rules for clubbing: who owns what and who pays taxes

In essence, Section 64(1)(iv) is a "clubbing" rule that stops people from avoiding taxes. Rahul Charkha, a partner at the law firm Economic Laws Practice, says, "If a person gives an asset to their spouse without getting anything in return (like a gift), any income from that asset, including rent and long-term capital gains (LTCG) on sale, is considered to be the income of the spouse who transferred the property and is taxed in that spouse's hands, as long as the marriage lasts and the asset can be traced back to that transfer."

The spouse who gets the property can legally become the registered owner through a gift or settlement. However, for tax purposes, the LTCG is still considered to belong to the original owner because of the deeming fiction in Section 64(1)(iv). Charkha explains, "So, even though the spouse who got the property signed the sale deed, the LTCG is still available to the transferor because of clubbing."

Planning ahead helps you stay out of trouble with taxes

But structuring is very important. Aarjav Jain, Executive Director and NRI Tax Expert at Dinesh Aarjav and Associates, Chartered Accountants, says, "For example, if money is given to a spouse as an interest-free, unsecured loan and the spouse buys the property on their own, clubbing provisions may not apply, which means that taxes can be shifted legally."

The clubbing rules say that the gains are exclusively taxable for the donor spouse, thus only the donor spouse should disclose the income on their tax return. This makes sure that spouses don't have to pay taxes twice.

"To avoid any problems for the seller, it would be important to keep a validly executed gift deed or a signed gift acknowledgment letter at the time of transfer." "Wherever possible, the property can be formally registered in the recipient's name with the consideration clearly recorded as a gift," explains Zeel Jambuwala, co-founder and partner at Aurtus, a full-service tax business.

If tax authorities question who owns the property, where the money came from, or whether clubbing provisions apply, tax conflicts commonly happen when family members move property around. The gift deed or family settlement deed should explicitly state the relationship between the parties, indicate whether the transfer is without payment, and give full information about the property.

"This document finally becomes the main source of information for tax authorities when they look into whether clubbing provisions apply. Charkha states that taxpayers should also keep evidence of the initial purchase and cost of the property, such as sale agreements, conveyance deeds, stamp duty receipts, and records of additions or repairs.

Q: What is Capital Gains Tax on property in India? A: This is a tax levied on the profit earned from selling a property.  1. Short-Term Capital Gains (STCG): If you sell the property within 24 months (2 years) of purchase, the gains are added to your income and taxed as per your income tax slab. 2. Long-Term Capital Gains (LTCG): If you sell after 24 months, the gains are taxed at a lower rate (currently 20% with indexation benefit) after applying the cost inflation index. There are also provisions for exemptions if you reinvest the gains into another property or specific bonds.

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Mutual funds are widely used investment instruments in India because they offer diversification and professional management. However, investors should understand that mutual funds are taxable, and the tax treatment depends on factors such as holding period and the type of scheme. Understanding how taxation works can help investors evaluate the potential returns from their investments more realistically.

Are mutual funds taxable?

Yes, mutual funds are taxable in India. The tax liability generally arises in two situations:

When an investor redeems or sells units of mutual funds

When income is received through dividends from mutual funds

The tax treatment depends largely on whether the gains are considered short-term or long-term. The classification is determined by the duration for which the investor holds the mutual funds before redemption. Since tax regulations may change over time, investors should periodically review applicable rules to understand their potential tax implications.

Taxation on capital gains from mutual funds

Capital gains arise when investors sell their mutual funds at a value higher than the purchase price. These gains may attract tax depending on the holding period and applicable tax rules.

Two common classifications include:

Short-term capital gains (STCG): Gains realised within the specified holding period will be taxed as per the slab rate applicable to the investor.

Long-term capital gains (LTCG): Gains realised after the defined holding period will be taxed at the slab rate for debt mutual funds and 12.5% above Rs. 1.25 lakh for equity mutual funds.

Using an index fund calculator to estimate potential outcomes

An index fund calculator can help investors estimate potential growth scenarios for investments made through index-based mutual funds. By entering values such as investment amount, expected rate of return, and time horizon, investors may view a projected investment value. Keep in mind, though, that these returns are not guaranteed, but only projections.

Conclusion

Mutual funds can offer investment opportunities with growth potential over time, but taxation plays an important role in determining actual outcomes. Investors should review taxation rules, understand their potential implications, and consider their investment horizon carefully before investing in mutual funds. Consulting a qualified financial planner or investment advisor may help in evaluating suitable strategies based on individual financial goals and risk tolerance.

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