Holding period of property determines type of capital gains and taxes applicable

For 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 improvements made later


Indranil Bhoumik/Mint
Indranil Bhoumik/Mint

My mother had bought a house, which I inherited upon her death. I am the sole legal heir of this property. I have now sold the house for Rs30 lakh. How will capital gains be computed? Are there any re-investment options available?

—Purvi Sheth

The gains, if any, resulting from sale of the inherited house property shall be taxable as ‘capital gains’. In case of inheritance, the period of holding of house will be considered from the acquisition date of house by the owner who has actually acquired the said asset, otherwise than by means such as inheritance or gift. (i.e., from the date of purchase by your mother). Assuming that the house had been held by you and your mother for more than 36 months from the acquisition date, the same shall be termed as a long-term capital asset and the resulting gains, if any, shall be classified as long-term capital gains (LTCG).

In case of 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 improvements made later (i.e., cost at which your mother acquired the property).

The aforesaid cost of acquisition (the cost at which your mother acquired this house) and the improvements, if any, made subsequent to the purchase by you and your mother should be increased using the applicable Cost Inflation Index (CII), notified by the income tax department.

The LTCG should be computed as the difference between net sale proceeds and indexed cost of acquisition and improvement, if any.

You can avail an exemption from LTCG tax by reinvesting the taxable LTCG in one new residential property situated in India, within 1 year prior or 2 years after the sale date of old house (if the property is acquired) or within 3 years (if the house is constructed) and subject to other conditions laid down in section 54.

If you are unable to make the new investment by the due date of filing the tax return, i.e., 31 July, you should deposit the money in the Capital Gains Account Scheme account with a prescribed nationalized bank, to be able to claim the aforesaid exemption in the tax return. Also, ensure that the new house is not sold within 3 years, else the exemption claimed gets withdrawn.

Alternatively, 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 at 15% (if applicable) and education cess at 3% should be levied on such tax liability.

Please note that in case the old house property has been held for less than 36 months, the capital gains will be taxable as short-term capital gains (STCG). Further, you will not be able to re-invest the STCG into a new house or bonds, as mentioned earlier, to avail the tax benefit or exemption. The entire STCG shall be taxable as per the income slab rate applicable to you.

Is the tax deduction limit of Rs2 lakh for repayment of interest on a housing loan available to an individual or is it on the basis of property?

—Akhil Sawain

The tax deduction for home loan availed is available against income from the house property in the hands of the individual as an owner.

The quantum of deduction towards interest paid on home loan would depend upon whether the property against which the loan is availed is a self-occupied property or a let out property or deemed to be let out.

Parizad Sirwalla is partner (tax), KPMG.

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