Agricultural land situated in specified areas is not considered a capital asset

In case of inheritance, the holding period of land is taken from the acquisition date by the owner who actually acquired it


Pradeep Gaur/Mint
Pradeep Gaur/Mint

I have inherited about 1 acre of land. It was originally purchased by my father in May 1995. I want to sell it in May 2017. Will the money received through sale of land be taxable?

—Deepak Kumar

Agricultural land situated in specified areas is not considered as capital asset (under section 2(1A) of the income tax Act).

In the absence of information, we have assumed that the inherited land is neither an agricultural land nor situated in specified areas. Accordingly, there will be capital gain tax implications on such sale.

In case of inheritance, the period of holding of land is taken from the acquisition date of land by the owner who has actually acquired the said asset otherwise than by inheritance, gift, etc. As the land has been held by you for more than 24 months from the date of acquisition, the gains, if any, resulting from sale of land shall be termed as long term capital gains (LTCG) and shall be taxable in your hands.

The cost of acquisition shall be the cost at which the previous owner, who has actually acquired the house other than by inheritance or gift.

Further, since the land was acquired prior to 1 April 2001, you have an option of taking the actual cost of acquisition or fair market value (FMV) of the property as on 1 April 2001. Accordingly, while calculating the LTCG, the cost of acquisition shall be the price at which your father acquired the land or the FMV as on 1 April 2001.

The aforesaid cost of acquisition and improvement, if any, made subsequent to the purchase or 1 April 2001 (if FMV as on 1 April 2001 is considered as cost), if any, by you and your father should be increased using the applicable Cost Inflation Index (CII). CII is the index notified by the income tax department to take into account the effect of inflation throughout the holding period (i.e., from the date of purchase till the date of sale). CII for the relevant financial year is notified on an annual basis.

The LTCG should be computed as the difference between net sale proceeds and indexed cost of acquisition and improvement, if any. Also, indexed cost is calculated by applying the CII.

You can avail an exemption from LTCG tax by reinvesting the net sale proceeds in one new residential property situated in India, within the specified time and condition laid down in section 54F.

You could also invest the LTCG in the bonds notified under section 54EC. The investment should be made within 6 months from the sale date, subject to a cap of Rs50 lakh.

Accordingly, the balance LTCG, if any, considering the aforesaid re-investment avenue, shall be taxed at flat 20%. Also, surcharge (if applicable) and education cess at 3% should be levied on such tax liability.

As per section 194-IA, where the sale consideration exceeds Rs50 lakh, the buyer of the property will have to deduct tax at 1%, assuming you are a tax resident of India.

I had invested Rs13,500 on 25 February 2014 in a fixed term plan, which got matured on 13 March 2017. The amount received is Rs17,251. Amount gained is Rs3,751. As this is a debt investment, I need to pay tax on the gain made. Here I need your help. How much tax do I pay with indexation or without indexation?

—Pradeep Vishwas

The gains from redemption of debt-oriented funds are taxed as capital gains. Since you have held it for more than 36 months, the resulting gains would be classified as LTCG. Accordingly, indexation benefit will be available.

The cost of acquisition should be increased using the applicable CII as notified by the Income tax department.

The LTCG shall be computed as the difference between net sale proceeds and the indexed cost of acquisition.

Accordingly, you will earn taxable LTCG of Rs1,077 (i.e., 17,251 less 16,174 [13,500 x 1125/939]). CII for FY13-14 is 939 and CII for FY16-17 is 1,125.

On this, you will have to pay tax at flat 20.6% (plus education cess of 3%). If your total income exceeds Rs1 crore during the FY2016-17, surcharge at 15% will be applicable.

Considering the quantum of LTCG, re-investment in property or notified bonds has not been discussed.

Parizad Sirwalla is partner (tax), KPMG

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