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September 12, 2020

Selling old Furniture and Artworks? Know the Income Tax Implications

by CA Shivam Jaiswal in Income Tax

Selling old Furniture and Artworks? Know the Income Tax Implications

Artwork is something that is created by experience, study, or observation. Artworks would include drawings, photographs, paintings, sculptures and so on. Lately, ‘Art’ has emerged as an alternative investment instrument.

Perhaps one of the main causes for this increasing shift towards investments in art, are the volatile stock markets and the low rates of returns on the traditional means of investments. In this article let us understand the tax implications on the sale of artwork and furniture.

What do you mean by personal effects?

Section 2(14) of the Income Tax Act, 1961 defines the expression “capital asset” as property of any kind held by an assessee, whether or not connected with his business or profession, but does not include; “personal effects, that is to say, movable property including wearing apparel and furniture, but excludes jewellery, paintings, drawings and works of art held for personal use by the assessee or any member of his family dependent on him.”

It was therefore clear from the above definition of the expression “capital asset”, that if any property is considered an item of “personal effect” then it would not be considered as “capital asset” and hence the profit or gain in respect of the transfer of such personal effects would not be liable to income tax as capital gains.

Personal effects would include movable property such as wearing apparel, furniture, household articles, utensils, vehicles, etc. held for personal use. Jewellery which has been excluded from personal effects would include ornaments made of gold, silver, platinum or any other precious metal, precious or semi-precious stones and any articles set in any such stones.

Are capital gains applicable on sale of furniture which was used for personal purposes?

Since furniture is for personal use it is outside the definition of capital asset, as such capital gains cannot be levied. The entire receipt on sale of furniture for personal use on which no depreciation has been charged is capital receipt not liable for taxation.

What are the tax implications on sale of furniture by an assessee who is in the business of selling furniture?

With respect to assets that are used for the purpose of business, tax payers are allowed to claim depreciation on the cost of acquisition of such assets. The depreciation, under the income tax laws, for such assets is allowed, on the basis of a concept called ‘block of assets’. The profit (Sale price – Written down value of furniture) on sale of such furniture will be taxed as business income under the head “Profits or Gains from Business or Profession”

Is a painting or sculpture a personal asset acquired for personal pleasure and, therefore, any gain made on the sale of such painting or sculpture not taxable?

  • This was the position till 31st March 2007, when a painting or sculpture was not regarded as a capital asset.
  • Therefore, any gains that one made on sale of such art was not subject to capital gains tax since only gains on the sale of a capital asset can be taxed.
  • However, from 1st April 2007, the gain is no longer tax-free since the definition of capital asset has been amended to include paintings, sculptures, drawings, archaeological collections or any work of art.

How are works of art taxed?

  • If you hold the painting or sculpture for at least three years, the gains you make would be regarded as long-term capital gains.
  • The gains would be computed by indexing the cost applying the cost inflation index and taxed at 20%, the effective rate being less than 20% of the actual gains on account of the cost indexation benefit.
  • If you sell it within three years of acquiring it, the gains would be treated as short-term capital gains taxable at your normal tax slab rates.

What expenses incurred on artworks are allowed as a deduction?

  • For the purposes of computing the gains arising on the sale of capital assets, the cost of acquisition / improvement of the asset and any expenses incurred on transfer of the capital asset are reduced from the full value of the sale consideration received. 
  • The sales tax or value-added tax paid on the purchase of a work of art would form part of the cost of acquisition for computing capital gains.
  • If you have bought an old painting and have spent on restoring it, then such restoration cost would normally not be allowed as a deduction from your normal income, unless you earn income from the painting, such as by renting it to a gallery, in which case the amount could possibly be claimed as a deduction from such income.
  • If you are unable to claim such expense, then at the time of sale, such restoration cost could be claimed as a cost of improvement if you are able to prove that the painting was in a damaged state when you acquired it, and by restoration, the value of the painting has been enhanced.
  • The restoration cost, being a cost of improvement, would be eligible for indexation from the year in which it was incurred.
  • If you store a painting in a vault, and incur storage expenses then such storage expenses are actually expenses of holding on to the asset and they do not contribute to the improvement of the asset or earning of income in any way. Such storage costs are, therefore, normally are not allowed as a deduction either from normal income, or from the capital gains earned at the time of sale.

Is income from artwork taxable in any other head?

  • Income earned while you own the painting, such as rent for allowing it to be displayed in an exhibition, or a fee for allowing it to be reprinted in a book, would be taxed as normal income under the head “income from other sources”.
  • If you artwork whose aggregate value exceeds Rs 50,000 during a year, such a gift received is subject to income-tax, taxable at tax slab rates.
  • If you buy artworks at concessional prices and the value of the concession exceeds Rs 50,000 in a year, the value of the concession that you obtained is also subject to income-tax as a deemed gift.

With an eye for art and a willingness to take a little risk, a new or experienced investor can find art investment incredibly rewarding. Though it should only be part of your overall portfolio, art can round out other investments nicely.

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