Even though you may be the sole owner of a property, there are tax implications on the transfer of your property to another person, as the transaction is likely to fetch gains for the seller. Even if that is not the case (as it true in case of gifting of property or transferring the rights to another person through a will) the transfer must be made, keeping in mind the provisions of applicable tax laws.
In this article, we discuss the Transfer of Property Act, which primarily sets the path for property transfer from one individual to another.
Transfer of Property Act
Under the Indian legal system, properties are divided into two categories – movable and immovable. The Transfer of Property Act (ToPA), 1882, which came into force on July 1, 1882, deals with the aspects of transfer of properties between living beings. One of the oldest laws in the Indian legal system, the ToPA is an extension of the law of contracts and runs parallel to the succession laws. For those planning to transfer their immovable property, knowing the key aspects of this Act is important.
Scope of the Transfer of Property Act
Ways in which property transfer can take place
A transfer of property can be effectuated by act of two or more parties or an act by the operation of the law.
The Transfer of Property Act is applicable primarily on transfer of immovable property from one living being (inter vivos) to another. Also, the Act is applicable on property transfer by individuals, as well as by companies. However, the Transfer of Property Act is applicable to acts of parties and not on transfers applicable by the law.
What does ‘transfer’ of property signify?
The term transfer includes transfer through sale, mortgage, lease, actionable claim, gift or exchange. The Act does not cover transfers by the operation of law, in the form of inheritance, forfeiture, insolvency, or sale through the execution of a decree. The Act is also not applicable on the disposal of properties through wills and does not deal with cases of succession of property.
Types of property transfer under the Transfer of Property Act
The Transfer of Property Act talks about six types of property transfers:
- Actionable claim
Who can transfer property?
Section 7 of the Act lays down the rules, vis-à-vis people who are legally eligible to transfer their property.
‘Every person competent to contract and entitled to transferable property, or authorised to dispose of transferable property not his own, is competent to transfer such property, either wholly or in part and either absolutely or conditionally, in the circumstances, to the extent and in the manner, allowed and prescribed by any law for the time being in force,’ the section reads.
Under the Indian Contract Act, 1872, a person must be at least 18 years of age and have a sound mind, to be eligible to enter into a contract.
Properties that cannot be transferred under the Transfer of Property Act
In terms of immovable property, one cannot transfer a property that one expects to inherit in future. Example: Ram expects that his maternal uncle, who had no children of his own, would bequeath his property to him and he transfers his right in the property to his son, the transaction would be held invalid.
A lessor can also not transfer his right to re-entry into a leased property, under the Transfer of Property Act. Example: Ram leases his plot to Mohan and puts in a clause in the lease agreement that he would have the right to re-enter, if the rent is not paid for over three months, then, he alone will have the right to do so. He cannot pass on his right to re-enter to, say, Ganesh, his associate.
A real estate developer who has entered into a joint development agreement (JDA) with a land owner, to build a project on the latter’s land, is also not allowed to transfer the ownership of the project thus created under the provisions of the ToP Act. The implications of the JDA are restricted only to the development part of the project. The builder will have to get a general power of attorney to sell the project on behalf of the owner. Even in this scenario, the land owner will be the one providing the conveyance deed to the prospective buyers of the project.
The Act also prohibits the transfer of easement rights – a right to use someone else’s land or property in some way. These include the rights of way (passage), the rights of light, the right of water, etc. Example: Ram has a right of passage over the land belonging to Mohan. Ram decides to transfer this right of way to Ganesh. As this is a transfer of an easement right, it is invalid.
One can also not transfer one’s interest in a property, restricted in its enjoyment. Example: If a house is lent to Ram for his personal use, he cannot transfer his right of enjoyment to Mohan.
A right to future maintenance is only for the personal benefit of the person to whom it is granted. Hence, this right cannot be transferred. A tenant having a non-transferable right of occupancy, cannot alienate or assign his interests in the occupancy. Similarly, a farmer of an estate that has defaulted in paying revenue, cannot assign his interest in the holding. The same is true of a lessee of an estate under the management of a court of wards.
Transfer of property through verbal agreement
Section 9 of the Act says that property transfers could be affected though an oral agreement, unless the law explicitly states that a written agreement must be prepared to conclude the transaction. In the case of immovable property of value less than Rs 100, such transfers may be made either through a registered instrument or by delivery of the property.
However, oral arrangements do not typically work, except for partition of properties, where the family members can enter into a verbal agreement and divide the property for practical purposes. Exchange of property often requires written agreements for the transaction to be legally valid. This is true for sale, gifts, leases, etc.
Transfer of property to an unborn child
A person who is planning to bequeath his property to more generations than one, will have to keep the provisions of the Transfer of Property Act in mind, while doing so. This becomes imperative to avoid legal complications at a later stage.
Under the provisions made in Section 13 and Section 14 of the Transfer of Property Act, the transfer of a property directly in favour of an unborn child is prohibited. For this to happen, the person intending to make the transfer will first have to transfer it in favour of a person who is alive on the date of transfer. The property will have to vest in the name of this person, till the time that the unborn child comes into existence. Basically, the interest of the unborn child in a property must be preceded by a prior interest.
Example: Suppose Ram transfers his property to his son Mohan and thereafter, to his unborn grandchild. In case he was not born before the death of Ram, the transfer would not be valid. The transfer would be valid, if the child is born before Ram passes away and the interest of the property vests in Mohan, till the child is born.
Responsibilities of the seller during transfer of property
Section 54 of the Act talks about the responsibilities of the seller of a property:
- To disclose to the buyer any material defect in the property.
- To provide to the buyer on his request for examination, all documents of title relating to the property.
- To answer to the best of his information, all relevant questions put to him by the buyer with respect to the property or the title.
- To execute a proper conveyance of the property, when the buyer tenders it to him for execution at a proper time and place, on payment or tender of the amount due in respect of the price.
- To take as much care of the property and all documents, which are in his possession, as an owner of ordinary prudence would take of such property, between the date of the contract of sale and the delivery of the property.
- To give the buyer possession of the property.
- To pay all public charges and rent accrued with respect to the property, up to the date of the sale.
- To discharge all encumbrances on the property then existing.
Duties of the buyer during transfer of property
- To disclose to the seller any fact about the property, of which the buyer is aware of but has reason to believe that the seller is not aware of and which materially increases the value of such interest.
- To pay the purchase money to the seller at the time and place of completing the sale.
- To bear any loss arising from the destruction, injury or decrease in value of the property not caused by the seller, where the ownership of the property has passed on to the buyer.
- To pay all public charges and rent, which may become payable on the property, the principal monies due on any encumbrances subject to which the property is sold and the interest thereon afterwards accruing due, where the ownership of the property has passed on to the buyer.
Transfer of Property Act: Key facts
Tenancy agreements governed under Transfer of Property Act arbitrable: SC
The Supreme Court, on December 14, 2020, ruled that landlord-tenant disputes can be resolved through arbitration, except when they are covered by specific forum created by the rent control laws. In a landmark verdict in the Vidya Drolia and others versus Durga Trading Corporation case, the SC has ruled that arbitral tribunals have the power to decide such cases under the Transfer of Property Act.
However, for these disputes to be resolved through arbitration, the rent agreement must have an arbitration clause – this means the decision to include a clause to this effect in a landlord-tenant agreement lies with the parties concerned.
What can be transferred under the Transfer of Property Act?
Any immovable property can be transferred under the Transfer of Property Act.
What are the modes of transfer of property?
According to the Transfer of Property Act, a property can be transferred through sale, exchange, gift, mortgage, lease and by creating an actionable claim.
How many sections are there in the Transfer of Property Act?
There are 137 sections in the Transfer of Property Act.