I got around Rs.50 lakh from the sale of an ancestral land (not agricultural land) I owned. I am 60 years old. I want to know if this amount will be taxed? I intend to distribute the money among my children. Will they be taxed?
The gains, if any, computed as per the Income-tax Act, shall be taxable under the head capital gains. For determining the capital gain tax rate, it has to be seen whether the land held by you qualifies as a long- or short-term capital asset. If the land is held for more than 36 months from the date of acquisition, it shall be classified as a long-term asset; if it is held for 36 months or less from the date of acquisition, it would be a short-term capital asset. In case of inheritance, the period of holding is counted from the date of purchase of the property by the owner, who actually acquired the land otherwise than by inheritance or gift.
Since it is an ancestral land, it is unlikely that the land could be categorized as a short-term capital asset and attract short-term capital gains (STCG) tax. Hence, we have proceeded on the basis that the land has been held for at least 36 months. Accordingly, long-term capital gains (LTCG) shall be computed as the difference between the sale proceeds less incidental expenses incurred in relation to sale of land and the cost of purchase and cost of improvement, if any, made subsequent to the purchase of land.
In case of inheritance, the cost of acquisition shall be the cost for which the previous owner who has acquired the land otherwise than by inheritance or gift as increased by the cost of improvement made subsequently.
In case the land was acquired by the original owner prior to 1 April 1981, you have the option of taking the actual cost of acquisition or fair market value (FMV) of the land as on 1 April 1981. Further, such cost shall be increased using the applicable cost inflation index notified by the income-tax department with respect to the base year when the land was first purchased, the financial year (FY) in which cost of improvement, if any, was made and the FY of sale of land respectively.
One can avail an exemption from LTCG tax by reinvesting the net sale proceeds in a new residential property within the specified time frames (within one year prior to the sale date or two years from the sale date or within three years for an under-construction property) as per section 54F of the Act or the LTCG in specified bonds issued by the National Highways Authority of India or Rural Electric Corp. Ltd under section 54EC of the Act subject to a lock-in period of three years.
We understand that you are likely to distribute the sale proceeds to your children and not invest in the prescribed avenues mentioned above. Hence, the entire LTCG shall be taxable at a flat rate of 20.6% (including education cess) being the rate applicable to LTCG.
As you may qualify as a senior citizen, if your income is less than the maximum amount not chargeable to tax (currently Rs.2.5 lakh for senior citizens for FY13), then such shortfall can be adjusted against LTCG and only the balance LTCG could be taxed at 20.6%. The money paid to the children is not allowed as a deduction and the capital gain will be calculated on the gross sale proceeds.
Please note that if the land has been held for 36 months or less from the date of acquisition, then the entire STCG without indexation shall be taxable as per the applicable income slab tax rate.
Further, if the sale of the land results in long-term capital loss or short-term capital loss, the same could be set off against LTCG and/or STCG as the case may be, as per the specified set off provisions under the Act.
Another important aspect to be seen is the tax implication of cash distribution in the hands of your children. As per section 56 of the Act, the entire money received by an individual from any person during the FY without consideration, the aggregate value of which exceeds Rs.50,000 is taxable under the head “income from other sources”. However, an exemption is available if such money is received from a relative, which includes among others, any lineal ascendant or descendant of the individual. Accordingly, the cash distribution shall not attract any tax implications in the hands of your children.
You may examine the documentation/registration and applicability of stamp duty with respect to the gift transaction.
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