Capital gains liability on transfer of asset to a company

1. Capital Gains Tax on Transfer to LLP:

• Nature of Transfer: Transferring property to an LLP, even where you and your wife are equal partners, is considered a "transfer" under Section 45 of the Income Tax Act, triggering capital gains tax.

• Capital Gains Calculation: The capital gain is computed as:

  • Without Indexation: If you opt for the 12.5% tax rate, the Fair Market Value (FMV) of the property on the date of transfer is considered the sale consideration.

  • With Indexation: If you choose the 20% tax rate, the Indexed Cost of Acquisition (ICOA) is subtracted from the FMV to determine the taxable gain.

2. Tax Rate Options Post-Amendment:

• Option A: 12.5% Tax Rate without Indexation

• Option B: 20% Tax Rate with Indexation

This dual-option system was introduced following public feedback to provide flexibility to taxpayers.

3. Strategies to Mitigate Capital Gains Tax:

• Reinvestment under Section 54F:

  • Eligibility: Available if the capital gains are reinvested in purchasing or constructing a new residential house within the stipulated time frames.

  • Conditions: The exemption is proportionate to the investment made in the new property relative to the net consideration received from the original sale.

• Investment in Specified Bonds under Section 54EC:

  • Eligibility: Allows investment of up to ₹50 lakh in specified bonds (e.g., NHAI or REC) within six months of the transfer.

  • Lock-in Period: The bonds have a lock-in period of five years.

• Alternative Structuring:

  • Lease Agreement: Instead of transferring ownership, consider leasing the property to the LLP. This approach avoids immediate capital gains tax and provides the LLP with usage rights.

  • Capital Contribution: Transfer the property as a capital contribution to the LLP. However, this still triggers capital gains tax based on the property's FMV.

4. Recommendations:

• Assess Tax Implications: Carefully evaluate both tax rate options (12.5% without indexation vs. 20% with indexation) to determine which is more beneficial based on your property's appreciation and holding period.

Go with Option B:
✅ Sell current property → Buy new property → Claim Section 54F exemption → Transfer to LLP later.
❌ Avoid Option A, as transferring to LLP first triggers immediate capital gains tax without exemptions.

For detailed, personalized advice, consider a phone consultancy. Hope you find the information helpful. You are free to contact me for further discussion. If you could spare two minutes of your time to write a review, it would be greatly appreciated and bring immense happiness to read it. Thank you. Shubham Goyal.

Assuming you and your wife are partners in a LLP

- Land owned by you and your wife is treated as a capital asset and not business asset

- Capital asset transferred by partner to a firm attracts capital gain tax in the hands of partner. The value of sale consideration would be the amount recorded for the capital asset in the books of accounts of the LLP

- For LLP it would be a stock in trade. Conversion of capital asset in to stock in trade is taxable when asset would be sold

- In both the option A and B, capital gain would be attracted in the hands of partners at the time of transfer of capital asset to the LLP

- In option A, sale of stock in trade by LLP would be treated as business income

- Evaluation between option A and B need specific value of the capital asset, amount to be recorded in the books of accounts etc.

For detailed discussion you may opt for phone consultation