Invest LTCG from property sale in specified avenues to save tax

In case of an inheritance, the cost of acquisition should be the cost for which the previous owner who actually acquired the property other than by inheritance or gift, as increased by cost of improvement made later


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I sold my grandmother’s ancestral land (non-farming), which I had inherited in October 2015. The land was acquired in 1972. Will I be taxed on the proceeds?

—Khaitan Parashar

The capital gain, if any, resulting from sale of inherited property (non-agricultural land) shall be taxable in your hands. For computing capital gains in case of an ancestral 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 sold an ancestral land that your grandmother acquired in 1972 (assuming she acquired the land other than by inheritance or gift), the resulting gains shall be classified as long-term capital gains (LTCG) and accordingly, you can claim benefit of indexation.

In case of an inheritance, the cost of acquisition should be the cost for which the previous owner who actually acquired the property other than by inheritance or gift, as increased by cost of improvement made later. Since your grandmother acquired the land prior to 1 April 1981, you can take the actual cost of acquisition or the land’s Fair Market Value as on 1 April 1981.

The cost of acquisition and improvement, if any, made after the purchase should be increased using the applicable cost inflation index (CII) notified by the income-tax department with respect to the base financial year (FY), the FY in which cost of improvement is used, and the FY of sale. In your case, CII of base FY82 (i.e., 100) should be considered for cost of acquisition.

LTCG shall be computed as difference between net sale proceeds and indexation cost of acquisition and improvement.

You can avail an exemption from LTCG tax by reinvesting the sale consideration in only one new residential property situated in India within the specified time (within one year prior to sale date or two years from sale date or within three years of sale date for an under-construction property), subject to fulfilment of other conditions under section 54F.

Alternatively, you can invest the proceeds in specified bonds issued by the National Highways Authority of India or Rural Electric Corp. Ltd under section 54EC. The investment should be made within six months from the sale, subject to a cap of Rs.50 lakh. The balance amount, if any, shall be taxable at 20%.

If your total taxable income during FY16 exceeds Rs.1 crore, you would be required to pay a surcharge at 12% on the basic rate (20%). An education cess of 3% on basic as well as surcharge (if applicable) should be levied.

If your total income for the FY as reduced by the LTCG is below the applicable (depending upon age) basic income exemption threshold for that year, the gains shall be reduced by the amount by which the total income so reduced falls short of the basic income exemption limit. The balance LTCG shall be taxed at flat rate of 20%. Education cess of 3% on basic as well as surcharge (if applicable) would be levied.

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