• Tax Implications in Oral family settlement (recorded through memorandum)

Hi,

My father expired recently without leaving any will. My mother, my married brother and myself (married daughter) are his only legal heirs. We want to do an Oral family settlement (recorded through memorandum) in order to resolve conflict between us. 

The conflicts are as following:- 

1. My mother started borrowing money for her sole proprietorship business from me about 6 years back through several online banking transactions. Every year she also keeps returning some principal amount back and pays annual interest on outstanding principal amount too. Now since there is no written agreement there is a dispute on the total outstanding amount that she needs to pay me in order to settle the loan. As per her Rs. 23.5 lacs are remaining and as per my understanding this is less amount - about 5 to 6 lacs short (outstanding amount should be about Rs 29 lacs).

2. I gave Rs. 6.5 Lacs (single online transaction) to my late father as loan. No interest has been paid on this loan so far. Now to repay this loan there is a disagreement as to how much interest needs to be paid to me for this loan by my mother and brother.

Also, there is a PPF account of my late father from which my mother as a nominee received a sum Rs. 30 Lacs (approx.) 

We, the 3 legal heirs would like to settle the dispute through Oral family settlement (recorded through memorandum) as following :- 

I would receive Rs 23.5 Lacs as repayment towards outstanding loan from my mother. Also I am willing to let go my interest on Rs. 6.5 Lacs loan given to my father and will just receive 6.5 Lacs from my mother. In return my mother and brother would give me Rs 15 Lacs (Rs 11 lacs is my inherited share and Rs 4 lacs is settlement amount) out of the total PPF amount received. So the total payout of Rs 45 Lacs would be given to me from my mother's account to settle all disputes.

My queries:

1. As per my understanding there is no need to register an Oral Family Settlement that has been recorded through memorandum - is this correct?

2. Does above contribute to a valid family settlement? Do all 3 of us need to sign it or just my mother and myself? 

3. Would there be any capital gain tax applicable on transfer of Rs 45 Lacs from my mother's account to mine? 

4. Is there any mandatory requirement for witnesses to sign this agreement? 

5. There is one immovable property (plot of land) which is going to be divided between the 3 legal heirs equally. Would this settlement affect this property, as we haven't included it in the family settlement as there is no dispute on this?

6. For both 23.5 Lacs and 6.5 Lacs loans there are no written loan agreements. Is there a need for loan agreements for income tax purpose or would this memorandum of settlement suffice?
Asked 12 months ago in Capital Gains Tax

1)As per Indian law, an oral family settlement is recognized as a valid means of resolving disputes among family members. A settlement agreement recorded through a memorandum does not need to be registered.

2)Given that all legal heirs have agreed to it and taken it into consideration, the proposed settlement appears to be legal. All three legal heirs should sign the memorandum of settlement to make it binding and enforceable.

3)As per Indian income tax laws, a gift of money exceeding Rs. 50,000 from a non-relative is taxable as income in the hands of the recipient.Since the transfer of Rs. 45 lakhs from your mother's account to yours is part of a family settlement and is based on inheritance rights, it would not be subject to capital gains tax.

4)There is no mandatory requirement for witnesses to sign an oral family settlement agreement recorded through a memorandum. However, having witnesses sign the agreement can add weight and credibility to the settlement and can help in case of any future disputes or challenges to the agreement. Witnesses can also provide evidence that the settlement was entered into voluntarily and with the consent of all legal heirs. Therefore, it is always advisable to have witnesses sign the agreement if possible.

5)If there is no dispute over the division of the immovable property and all legal heirs are in agreement to divide it equally, then there is no need to include it in the family settlement agreement.However, it is advisable to execute a separate deed of partition for the immovable property to avoid any future disputes.

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 really grateful and very happy to read it.

 

Thank you.

Shubham Goyal
CA, Delhi
177 Answers
2 Consultations

5.0 on 5.0

- Assuming Hindu Succession Act 1956 is applicable to you

- In case of male dying intestate, the distribution of the property belonging to the male dying intestate is governed by the Hindu Succession Act,1956. The distribution of the property would be in equal ratio in the hands of your mother, brother and you.

 

1. You can register the family settlement deed to counter the dispute in future. Also draft relinquishment deed for release of any share in the inherited property by the legal heir.

2. All parties to the settlement deed should sign it along with witnesses

3. No

4. Yes

5. You should include this also to avoid future dispute

6. Ideally there should be loan agreements for both the transactions

Vivek Kumar Arora
CA, Delhi
4810 Answers
1013 Consultations

5.0 on 5.0

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