Disputes over ancestral property is not uncommon. Family Settlement is a way to reach a peaceful arrangement avoiding long and expensive legal process.
WHAT IS A FAMILY SETTLEMENT ?
Family settlement is an agreement between the family members who have title, claim or interest in the property. Family settlement is applicable not only to immovable assets, but also to movable assets such as jewelry and money in bank accounts.
REQUIREMENTS OF FAMILY SETTLEMENT
A family settlement has to be between related people, i.e. between members of a family.
It has to be entered by all family members voluntarily and with good faith without any force or fraud. Generally, an agreement is reached in the presence of a lawyer or a senior family member. A settlement can be oral, in which case no settlement is required. Also, a mere memorandum that an arrangement is reached also is not required to be registered. But, if an agreement is prepared with the terms and recitals of the family arrangement, that documents need to be registered under the Registration Act 1908, as per the judgement of the case Sita Ram Bhama vs Ramvatar Bhama dated 23rd March 2018. All family members must sign the settlement document.
BENEFITS OF A FAMILY SETTMENT
1. NO CAPITAL GAINS TAX
A family settlement is not considered as a transfer, but merely rearrangement of the rights. Therefor a family settlement does not attract any capital gains tax.
2. NOT TREATED AS A GIFT
As per Income Tax Act 1961, Gifts of any kind, whether in cash or other movable or immovable more than value of Rs. 50,000 is considered as income from other sources and tax accordingly. Family settlement is not considered as a gift.
3. CLUBBING PROVISIONS IS NOT APPLICABLE
Clubbing of income means income of another person (for example: Spouse) included in the income of the tax payer. Section 60 to 64 of the Income Tax Act deals with such provisions.
In case of family settlements such provisions are not applicable.
While family settlement offers an easy and peaceful way to organize assets, it can be only used when the dispute between the members are not excessive and the members are willing to settle. Also, although a family settlement is quite enforceable, it can be challenged on the ground that the settlement was not reached in good faith and all information was not available to everyone.
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