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Capital Gain on Sale of Gifted or Inherited Properties

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Capital Gain on Gifted Property

capital asset being shares and securities (listed), unit of UTI (listed/unlisted), unit of equity oriented mutual fund (listed/unlisted), zero coupon bonds (listed/unlisted) is considered as long term capital asset if it is retained for more than 12 months and 24 months in case of unlisted shares and securities and land or building or both and 36 months in case of other assets .

Any gain, arising from its sales is considered as long term capital gain. In case of long term capital gains the capital gains is calculated according to indexed cost of acquisition and improvement. Cost inflation index of the year of acquisition and improvement is considered for the purpose of capital gain calculation.

Where the capital asset is acquired by a person as a result of gift or inheritance, the question arises in mind about whether capital gain tax is applicable on sale of assets acquired through gift or inheritance and which year’s cost inflation index should be considered for calculating indexed cost of acquisition.

Any income that arises from the sale of a capital asset, irrespective of whether the asset was initially purchased or inherited, would be considered as capital gains. Section 49(1) also provides that in such cases the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be.

Thus the cost of acquisition as well as the cost of improvement by the previous owner of a capital asset shall be the cost of acquisition of such asset to the person selling the such capital asset acquired under gift or inheritance and the indexation shall be allowed from the year of acquisition or improvement by the previous owner.

Many court verdicts and tax tribunals have held that for gifted or inherited property (capital asset), the period of holding of asset should be considered from the time the previous owner acquired it. Based on such period of holding, an asset would be classified as short term or long term. Mumbai ITAT has also held in (2009) 318 ITR (AT)417 that the indexation in case of gifted or inherited property will be available from the year of acquisition of such property by previous owner, similar view also find support in (2012) 50 SOT 629, (2004) 89 TTJ Chd. Tribunal, 117 TTJ 121 Kolkata Tribunal, (2008) 19 SOT 251 Delhi Tribunal, (2010) 4 ITR 44 Chennai Tribunal.

Short Term Capital Gains on Gifted property is calculated as below:

STCG = (Total Sale Price)

– (Cost of acquisition)

– (expenses directly related to sale)

– (cost of improvements).

Calculation of Capital Gains on sale of property or house pic

Here, the cost of acquisition for the inheritor or receiver of the gift is NIL. But, for calculation of capital gain the cost to the previous owner (donor) is considered as the cost of acquisition of the Property.

Short Term Capital Gains are included in your taxable income and taxed at applicable income tax slab rates.

Long Term Capital Gains Calculation;

The LTCG calculation is similar to STCG. The only differences are, you are allowed to deduct Indexed Cost of Acquisition/Indexed Cost of Improvements from the sale price and also claim certain exemptions to save tax on long term capital gains.

calculation of capital gains on sale of gifted property in case of inherited property cost of acquitsion latest cii indexation FY 2017-18

Indexed Cost of Purchase

For calculating long term capital gains, the seller of immovable property can claim indexed cost of acquisition. Indexation is done by applying CII – Cost Inflation Index. This increases your cost base i.e., purchase price and lowers your gains. Your purchase price is adjusted for the impact of inflation.

Given below is the table showing CII numbers since 2001-02

Financial Year CII Number
2021-22 317
2020-21 301
2019-20 289
2018-19 280
2017-18 272
2016-17 264
2015-16 254
2014-15 240
2013-14 220
2012-13 200
2011-12 184
2010-11 167
2009-10 148
2008-09 137
2007-08 129
2006-07 122
2005-06 117
2004-05 113
2003-04 109
2002-03 105
2001-02 100

How do you calculate the indexed cost of purchase? The indexed cost is calculated with the help of a table of cost inflation index. Divide the cost at which you purchased the Property by the index as on the date of the purchase. Multiply this by the index as on the date of sale.

Below is the Cost Inflation Index Table from 2001-02 to FY 2020-21 for your reference. Cost Inflation Index (CII) for FY 2020-21/ AY 2021-22 Notified by CBDT at 301.

The confusion would be, whether you can claim indexation from the year in which you received the gift or from the year of acquisition by donor? – As discussed above, the year in which you have received the gift is not used for calculation.

Let me explain to you what is indexation, its benefits and how it is calculated, by continuing with the above example…

The purchase year is 1989 and year of sale is in Financial Year 2017-18. The cost of acquisition in 1989 was Rs 1 cr. As the year of acquisition was before FY 2001-02, the purchase price can be considered at ‘Fair market value (FMV)’ of that property as on 1st April, 2001, instead of cost of acquisition. (You can get the FMV details of a property from a Govt approved Property Valuer.)

So, the Indexed cost of purchase =  (FMV / 100) * 272.

Tax on Short-Term and Long-Term Capital Gains

Tax Type Condition Tax applicable
Long-term capital gains tax Except on sale of equity shares/ units of equity oriented fund 20%
Long-term capital gains tax On sale of Equity shares/ units of equity oriented fund 10% over and above Rs 1 lakh
Short-term capital gains tax When securities transaction tax is not applicable The short-term capital gain is added to your income tax return and the taxpayer is taxed according to his income tax slab.
Short-term capital gains tax When securities transaction tax is applicable 15%.

Tax on Equity and Debt Mutual Funds

Gains made on the sale of debt funds and equity funds are treated differently. Any fund that invests heavily in equities (more than 65% of their total portfolio) is called an equity fund.

Funds Effective 11 July 2014 On or before 10 July 2014
Short-Term Gains Long-Term Gains Short-Term Gains Long-Term Gains
Debt Funds At tax slab rates of the individual At 20% with indexation At tax slab rates of the individual 10% without indexation or 20% with indexation whichever is lower
Equity Funds 15% 10% over and above Rs 1 lakh without indexation. 15% Nil

Change in Tax Rules for Debt Mutual Funds

Debt mutual funds have to be held for more than 36 months to qualify as a long-term capital asset. It means you need to remain invested in these funds for at least three years to get the benefit of long-term capital gains tax. If redeemed within three years, the capital gains will be added to your income and will be taxed as per your income tax slab rate.

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