You can claim tax exemption on LTCG on inherited property sale
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In March this year, we sold a piece of non-agricultural land (inherited before 1980) for Rs.10 lakh, which was divided among three family members, including myself. It was acquired by my late grandmother and was transferred to our family. What are the tax implications? Considering that no cost of acquisition is available, how do we compute the gains?
—Sinmoy Jyoti Lahkar
We have assumed that all the family members who inherited the land are above 18 years of age. The non-agricultural land inherited by the three family members was sold during the financial year (FY) 2015-16.
The gains, if any, resulting from the sale of aforesaid inherited land shall be taxable in the hands of each of the family members under the head ‘capital gains’ (CG). For computing CG in case of such inherited property, the period of holding is reckoned from the date of purchase of property by the owner who actually acquired the property otherwise than by inheritance or gift.
As you have sold the ancestral land that was bought by your late grandmother prior to year 1980, the resulting CG shall be classified as long-term capital gains (LTCG). In case of an inherited property, the cost of acquisition should be the cost at which the previous owner who actually acquired the property other than by inheritance or gift, as increased by cost of improvement made later. Accordingly, the cost at which your grandmother bought the house prior to 1980 shall be considered as cost of acquisition. But since the cost of the land is not available and the same has been acquired before 1 April 1981, fair market value (FMV) of the land as on 1 April 1981 can be considered as cost of acquisition. For ascertaining the FMV, a valuation report has to be obtained from a registered valuer.
The LTCG shall be computed as the difference between net sale proceeds and indexation cost of acquisition and improvement. While calculating LTCG, the cost of acquisition and improvement, if any, should be adjusted by applying the cost inflation index (CII) notified by tax authorities in the year of purchase or improvement and sale, respectively. In your case, due to absence of actual cost of acquisition, since FMV of the land as on 1 April 1981 is considered as cost of acquisition, CII of FY 1980-81 (i.e., 100) should be considered for computing indexed cost of acquisition. CII for FY16 is 1081. The LTCG shall be taxable in the hands of each of the family member to the extent of their shares.
Documents substantiating inheritance of land, individual share of inherited property, among others, should be kept on record. The LTCG can be claimed as exempt from tax to the extent of each individual share of LTCG by re-investing the sale proceeds into one residential house located in India with the specified time frame and subject to the conditions laid down in section 54F of the Income-tax Act, 1961.
Each of you could also invest the LTCG in specified bonds to avail an exemption from LTCG tax under section 54EC of the Act, subject to specified conditions.
The balance amount of LTCG shall be taxable at 20%. If the total income during the FY17 exceeds Rs.1 crore, one would be required to pay a surcharge at 12% on the basic tax rate (i.e. 20%). An education cess of 3% would also be applicable on basic and surcharge (if applicable).
Further, if the original tax returns for FY16 was not filed within timeline (i.e., 5 August 2016), you will be eligible to revise the tax return and appropriately disclose carry forward of long-term capital loss (LTCL), if any from the above transaction. But if the original ROI was not filed, then you should file this as belated return. However, carry forward of LTCL, if any, from the above transaction, will not be eligible to be carried forward to subsequent FY for set off against the LTCG.
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