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Gift deed or Will: What’s the best way to pass on your assets to a loved one?

For the bequest of their wealth (assets/ properties) to their chosen heirs, asset owners can opt for either a will or a gift deed.

March 30, 2022 / 08:16 AM IST

Earlier this month, the Supreme Court ruled that if a donor is making a gift “of his free will and volition and is the exclusive owner of the property, it is nobody’s concern” as to whom he gives the property to.

This order, in Mohinder Singh Vs. Mal Singh, countered earlier reasoning that if a man living with a woman who is not his wife leaves his property to her, it is an immoral and improper act. She should not be the beneficiary of the gift deed even if it is properly executed, went the reasoning.

The ruling contradicted the previous view held by the Punjab and Haryana High Court in Lilu Ram & Anr. Vs. Mst Ram Piyari and by the same court in Ram Chander Parshad Vs. Sital Prasad, whereby co-habitation by a man with his mistress was considered an immoral consideration that could not support transfer of his assets.

We’ll get to the moral consideration later, but first the big question: Should you use a will or a gift deed to transfer your wealth to your loved ones?

What is a will and a gift deed?

A will is made by the testator while alive and comes into effect after his/her demise.

A gift under Section 122 of the Transfer of Property Act is a transfer of asset/property by a donor (asset owner) out of his own free will (voluntarily and willingly) to a donee (recipient) without any consideration.

The donor and the donee need to be alive and capable of giving and accepting the gift at the time it is given, as documented through execution of a gift deed.

If a gift is for consideration (part or inadequate) and is proven that the consideration existed in the transfer, it is categorised as a sale and not a gift.

The common thing between a gift and a will is that documentation should be proper, the recipient or the beneficiary could be any person or entity, whether family, friend, related or otherwise; the document needs to be attested by two witnesses.

Can a gift deed be challenged in court?

Kanjilal Pal, a widower with no children, was a government-licensed tourist guide in Darjeeling. He died at the age of 75 and in his will, he mentioned that 50 percent of his financial assets be bequeath to the Tourist Welfare Association for meeting the medical expenses of families of registered tourist guides. He wanted his house to be sold, and the proceeds donated to the local municipal hospital for installing a modern CT (computed tomography) scan machine.

In this case, except the niece and nephew (Pal’s sister’s children), no one was known to be close to or related to the testator. The family could have been silent on the presence of the will or could have attempted to prove defects in the document with the objective of defeating the wishes of the testator. However, they respected the will and abided by it in its entirety.

It is often the case that an aggrieved party challenges a gift deed after the death of the asset owner with the objective of derailing the execution of the will.

Common technical grounds are cited try to prove the gift deed  is false, and other allegations are levelled such as the presence of a hidden consideration or that no pure love and affection existed between the donor and the donee. Lastly, the absence of a relationship between the donor and donee may be cited in seeking a gift deed to be considered null and void.

Article 58 of the Limitation Act enables cancellation of a gift deed within three years of the accrual of the right to sue.

In every gift, the donor has a particular motive and objective or a reason to part with the asset/ property in favour of the donee; the reason could be love and affection if the gift is in favour of family, friends, or relatives, or spiritual benefit in other cases with the immediate motive based on a pure gratuitous consideration.

The case of Padmavati Bai Vs Raghvendra Rao points to this. So did the recent case of Mohinder Singh Vs. Mal Singh in the Supreme Court.

Are gift deeds taxable?

Under the Income Tax Act, gifts between specified relatives i.e. – between spouses, from parents to children (including step children and adopted children), among siblings or any other lineal ascendants or descendants -- are fully exempt from tax, but need to be documented through a deed if the value of the gift is above Rs 50,000.

In case of gift to a third party not related to the donor, the market value of the immovable property gifted is included as income from other sources in the income tax returns of the donee and the latter has to pay tax on it.

In the case of gifts between step brothers/ sisters, nephews/ nieces and cousins and to any other third party (in any form, whether cash, jewellery, movable/ immovable property,) the gift gets included under the head income from other sources of the donee’s income-tax returns and the donee has to pay tax on it. Contrary to this, a bequest under a will or receipt as inheritance is not taxed in the hands of the recipient or beneficiary.

Punarji Chandani, an insurance agent, died intestate (without a will) aged 68 years. The heirs (family) approached a court seeking a Letter of Administration to be able to distribute his assets among Class 1 heirs under the Hindu Succession Act.

While making the application, they stumbled across a copy of a registered gift deed through which he had gifted a Manesar flat to his secretary Premila Mehra.

As is common in many cases, the legal heirs (or those who were named in the will), went to court claiming that the property had been illegally snatched and the donor coerced to sign the document.

But the gift deed--and the resulting transfer-- was found to be legal and appropriate. Why? Because the donor would have gone willingly and in his sound mind, signed in front of two witnesses (this is done to ensure that no coercion or force is used). The donee had also mutated the flat in her name.

In simple words, this means that the flat had been legally transferred in Premila Mehra’s name through a legal process; a visit to the sub-registrar’s office to effect the transfer of the flat wherein the registered gift deed was taken on record.

Also, the donee had included the market value of the gift (the Manesar flat) in her income-tax returns under the head income from other sources. This made the gift deed legal.

(Examples and names cited in this article are merely for illustration purposes)

The author is founder and initiator, Inheritance Needs Services Pvt Ltd

Rajat Dutta is Founder & Initiator, Inheritance Needs Services
first published: Mar 30, 2022 08:15 am