Gains from sale of inherited house taxable as capital gains

In case of an inheritance, 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


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I have inherited a house from my father, which he bought in 1981. I plan to sell it as I am moving out of the country next year. How will I be taxed on the gains from this?

—Rajeev Bhatia

The gains, if any, resulting from sale of inherited residential house shall be taxable in your hands 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 are proposing to sell the ancestral house bought by your father in 1981, 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 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 father bought the house in 1981 shall be considered as cost of acquisition. 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. CII for FY17 is 1125.

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 LTCG 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 54 of the Income-tax Act, 1961. Or, you can invest the LTCG in specified bonds issued by specified organisations 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 of capital gains, if any, shall be taxable at 20%.

If your total taxable income during FY17 is likely to exceed Rs.1 crore, you would be required to pay a surcharge at 15% on the basic rate (20%). An education cess of 3% on basic as well as surcharge (if applicable) would 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 a flat rate of 20%. Education cess of 3% on basic as well as surcharge (if applicable) would be levied.

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