Should My Son Face Income Tax Issues After Owning a Flat Bought With My Savings?

Ans: Amount transferred to mother is a gift which is not considered as income. Income received by your mother on senior citizen FD will be taxable in her hand and she can take deduction of Rs.50000 u/s 80TTB

Ans: Tax will depend on cost of acquition of original owner

Ans: Your decision to extend a loan instead of a gift is prudent. It reduces potential income tax issues for you. Structuring this arrangement through a proper loan agreement ensures legal validity and clarity.

The direct payment to the seller strengthens your case with the tax authorities. It avoids suspicion about unaccounted money being involved in the transaction.

Your friend’s income from side roles in films, though modest, and the absence of tax filings, could raise concerns. This property purchase could attract scrutiny from the Income Tax Department.

Key Considerations for Structuring the Loan
Drafting a Loan Agreement
The loan agreement must clearly outline the terms of interest, tenure, and repayment. Specify the capital repayment timeline of ten years. This document is crucial for tax compliance and transparency.

Payment through Banking Channels
Ensure all transactions are routed through bank accounts. Avoid cash payments at any stage of the process.

Fair Interest Rate
A 6% annual interest rate is reasonable. It avoids being classified as a concessional or interest-free loan. This ensures no deemed gifting complications arise under the Income Tax Act.

Documentation for Proof of Loan
Keep proof of the loan, like bank transaction records, loan agreement, and interest payment receipts. This safeguards both parties from legal complications.

Tax Implications for You
Interest Income
The interest earned at 6% annually is taxable under “Income from Other Sources.” Declare this income in your tax returns every year.

TDS Compliance
Your friend must deduct tax at source (TDS) on the interest paid if applicable. Verify the threshold limits for TDS compliance to avoid issues.

Avoidance of Deemed Gift Issues
Since this is a loan and not a gift, no gift tax liability arises for either party.

Tax Implications for Your Friend
Income Tax Filing Requirement
Your friend’s cash income of Rs. 2.5 lakh annually is below the taxable limit. However, purchasing property valued at Rs. 28 lakh will create an asset in his name. This can draw the attention of tax authorities.

Reporting High-Value Transactions
Property purchases exceeding Rs. 30 lakh must be reported to the tax department. In your friend’s case, though below this limit, the source of Rs. 8 lakh (balance) must be clearly justified.

PAN and Filing of Returns
Encourage your friend to start filing Income Tax Returns. Filing returns enhances financial credibility and avoids scrutiny.

Recommendations for a Smooth Transaction
Source of Funds Verification
Ensure your friend has proper documentation for the Rs. 8 lakh balance payment. This will minimise questions from authorities.

ITR Filing as a Preventive Measure
Advise your friend to file ITR even if his income is below the taxable limit. This helps justify his financial profile in case of scrutiny.

Registering the Property Appropriately
Register the property with accurate details, including the loan arrangement. Keep registration costs and stamp duties in mind.

Monitor Interest Payments Regularly
Track interest payments diligently. Ensure these payments are timely and through proper banking channels.

Final Insights
Your thoughtful approach of structuring this transaction as a loan safeguards both parties. It ensures transparency and compliance with tax laws. Document every step meticulously and keep the financial arrangements clear. Encourage your friend to regularise his tax filings and maintain financial discipline.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

Ans: You can give the amount, kindly execute a gift deed

Vipul Bhavsar
Chartered Accountant
www.capitalca.in