Capital gains tax is one of the most significant parts of the Income Tax Act. Normally, whenever there is a transfer of a capital asset, the resulting profits are taxable. However, not all transactions are intended to generate gains. Some transfers are done as part of love, affection, family succession, or legal obligations. Taxing such transactions would be unfair.
To address this, Section 47 of Income Tax Act outlines specific cases where a transfer is not treated as a “transfer” for tax purposes. Among these, Section 47(iii) plays a very important role by exempting transfer of a capital asset under a gift, will, or an irrevocable trust. This provision ensures that individuals & Hindu Undivided Families (HUFs) can pass on assets without attracting unnecessary tax burdens.
What is Section 47(iii) of Income Tax Act?
Section 47(iii) of Income Tax Act states that any transfer of a capital asset by an individual or a Hindu Undivided Family (HUF) under a gift, will, or an irrevocable trust will not be regarded as a transfer.
This means such transactions are not liable to capital gains tax. In simple terms, if you transfer property or assets to a relative as a gift, or pass them on through a will, or assign them to an irrevocable trust, it will not be considered a taxable transfer under capital gains.
The logic is clear: gifts, wills, & trusts are not commercial sales but are made for personal or family reasons. Hence, they deserve exemption."
Transactions Not Regarded as Transfer
Section 47 as a whole lists transactions not regarded as transfer. Specifically, Section 47(iii) exempts certain transactions from being classified as transfers.
Key exempted cases are:
- Any transfer of a capital asset by an individual under a gift – Example: A father gifting his daughter a piece of ancestral land.
- Any transfer of a capital asset under a will – Example: Inheritance after the death of a family member.
- Any transfer of a capital asset to an irrevocable trust – Example: Assigning shares of a company to a charitable trust.
These transactions are excluded from the definition of “transfer” under capital gains provisions.
Also Read: Tax on Conversion of Capital Asset into Stock-in-Trade
Importance for Individuals and HUFs
The exemption under Section 47(iii) is applicable when:
- An individual transfers a capital asset.
- A Hindu Undivided Family (HUF) transfers a capital asset.
This provision is vital for tax planning in India, where joint families and inheritance structures are common. For instance, transferring property through a will helps avoid unnecessary litigation & tax disputes.
Gift Transfers – How They Work Under Section 47(iii)
A gift is one of the most common forms of transfer exempted under this section. Whether it is cash, immovable property like land, or movable assets like shares, a genuine gift made by an individual or HUF is not regarded as transfer."
Example: Mr. Sharma gifts his son shares worth ₹10 lakhs. Normally, transfer of shares attracts capital gains tax. But under Section 47(iii), this transfer is exempt. However, when the son sells those shares in the future, capital gains tax will apply based on the original cost of acquisition.
Will Transfers – Exemption from Tax
When a person passes away, the assets distributed to heirs under a will also fall under transactions not regarded as transfer.
Example: A mother bequeaths her flat to her daughter under a will. The act of transferring this flat is not taxed as capital gains. Only when the daughter sells the flat later will tax implications arise, based on the mother’s original cost of acquisition.
Also Read: Transactions Not Regarded as Transfer
Irrevocable Trust Transfers
A transfer to an irrevocable trust is also covered under Section 47(iii). This means once assets are moved into such a trust, they cannot be taken back by the transferor, ensuring permanence. Since this is not a commercial transaction, it is exempt from capital gains tax.
For instance, donating property worth ₹1 crore to a charitable trust is a noble act. Taxing such transfers would discourage social welfare activities. Hence, the exemption exists.
Why This Exemption Matters?
- Encourages Family Planning – Families can pass assets smoothly through gifts or wills without tax hurdles.
- Promotes Social Good – Donations to irrevocable trusts for charities are tax-free transfers.
- Avoids Double Taxation – Heirs or recipients are taxed only when they eventually sell the asset, not at the time of receiving it.
- Legal Clarity – By clearly stating that these are transactions not regarded as transfer, the law prevents disputes between taxpayers & the Income Tax Department.
Practical Example
Suppose Mr. Mehta gifts his daughter an apartment worth ₹50 lakhs. Under normal circumstances, such a transfer of a capital asset could attract capital gains tax. But because of Section 47(iii), the transfer is exempt. However, if the daughter later sells the apartment, the capital gains will be calculated based on the cost at which her father originally purchased it.
This ensures taxation happens only when an actual commercial gain is realized."
Key Takeaways
- Section 47(iii) of Income Tax Act specifically deals with exempting certain transactions from being classified as transfers.
- It covers any transfer of a capital asset by an individual or a Hindu Undivided Family (HUF) under:
- Gift
- Will
- Irrevocable trust
- These transactions are not regarded as transfer, hence no capital gains tax applies at that stage."
- Future sale by the recipient will attract tax based on original cost of acquisition.
Also Read: Meaning of “Transfer” in Capital Gains Taxation
Conclusion
By exempting transactions like gifts, wills, and transfers to irrevocable trusts, Section 47(iii) of Income Tax Act ensures fairness in taxation. It prevents taxing people for non-commercial transfers & provides smooth mechanisms for succession and charity.
Whether you are planning to gift property, write a will, or donate to a trust, this section gives you legal protection & tax relief. However, it is equally important to understand that the benefit applies only at the stage of transfer, and capital gains will arise when the recipient sells the asset in the future.
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