Timeshare ownership is ideal for vacations as it gives you the space and luxury of a resort instead of a cramped hotel room. It is also a hedge against inflation for your future leisure-lodging costs. With a variety of vacation ownerships available in the market, it is hard to choose any one, but certain timeshares also come with an option to transfer/exchange during the tenure of timeshare.
The option to sell or exchange the timeshare makes it an investment for future vacations. But before investing in timeshare ownership, it would be a good idea to know the tax implications relating to receipts arising from sale/exchange of such timeshare/vacation ownership. In India, this concept came in late 80s and brands like Dalmia Resorts, Ramada, Hyatt, Club Mahindra and Sterling are in the business.
Nature of income arising on sale of timeshare
Timeshare/vacation ownership is a right to use a resort/condominium apartment for a particular period (usually a week) during a year. One can say that since timeshare ownership is for personal use, it shall be a personal effect not liable to tax. But considering that personal effect is defined under the provisions of the Income-Tax Act to include something that is closely associated to the body or person of an individual, timeshare ownership shall not be considered as a personal effect. Inference may be drawn here from the fact that even a residential house is for personal use, but the same is regarded as a capital asset and gains arising on sale thereof are chargeable to tax as capital gains, depending on the period of holding.
Another view is that the consideration arising on assignment of timeshare ownership is in the nature of house property income, since what is transferred is the right to stay in a property for a period of one week. However, one has to note that there is no ownership of house property in the case of timeshare, but merely a right to use a particular property for a week; hence, income arising therefrom can’t be categorised as income from house property.
The money arising from transfer or exchange of timeshare shall amount to capital gains chargeable to tax. Capital gain is chargeable to tax at the rate depending on the period of holding. Where the timeshare ownership is transferred or exchanged after holding the same for three year, it will qualify as a long-term capital gain taxable at 20%. However, where it is transferred within a three-year of period of holding, the same shall qualify as a short-term capital gain taxable at the slab rate applicable to the individual.
So, before you think of selling your timeshare week to another person for a price, you have to ensure that tax liability arising thereon is duly discharged, in order to avoid adverse implications. One should not forget that even exchanging a timeshare with another person shall amount to transfer of capital asset chargeable to tax as capital gain. However, where the timeshare week is given to a relative without consideration, the same shall not result in any tax liability, since there is no provision in the Income-Tax Act to tax notional income/potential income.
The writer is managing partner, Nangia & Co. Inputs from Neha Malhotra