Gains from sale of inherited property taxed as capital gains

For computing capital gains 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 it, other than by inheritance or gift


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I am selling my ancestral residential property, which will fetch around Rs.30 lakh. This will be equally divided among all the heirs. What will be the tax liability of this transaction? Can this money be deposited in a savings bank account?

—Jay Sinha

In the absence of complete facts, we have assumed that the ancestral residential property is already inherited by all the children.

Further, we also assume that all the children are majors (i.e., above the age of 18 years). The gain, if any, resulting from the sale of inherited residential property shall be taxable under the head ‘capital gains’.

For computing capital gains 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 it, other than by inheritance or gift.

Assuming that the said property had been acquired and held for more than 36 months from the date of acquisition, the resulting gains shall be classified as long-term capital gains (LTCG).

In case of an inheritance, the cost of acquisition should be the cost at which your ancestor had bought the property.

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), i.e., the FY in which cost of improvement is used, and the FY of the sale.

In your case, if the property was bought before 1981, the CII of base FY82 (i.e., 100) should be considered as the cost of acquisition. CII for FY 2016-17 is 1,125.

LTCG should be computed as the difference between net sale proceeds and the indexed cost of acquisition and improvement. And this will be taxable in the hands of each of you, to the extent of the individual share of each child.

You can each avail an exemption from LTCG tax to the extent of each individual share of LTCG by reinvesting the LTCG in one new residential property situated in India, within the specified time—within one year prior to the sale date, or two years from sale date, or within three years of the sale date for an under-construction property.

All this is further subject to the fulfilment of conditions specified under section 54 of the Income-tax Act, 1961.

Each of you could also invest the LTCG in specified bonds under section 54EC. The investment should be made within six months from the sale date, subject to a threshold of Rs.50 lakh. The balance amount of capital gains, if any, will be taxable at 20%.

If the total taxable income during FY 2016-17 is likely to exceed Rs.1 crore, one 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 the 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 LTCG 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%, and surcharge (if applicable) would be levied.

However, if the sale proceeds are deposited into savings bank account and not invested in another residential house or specified bonds, as specified above, the aforesaid tax benefit will not be available. Accordingly, each of you would be required to pay tax on the net taxable LTCG to the extent of each share.

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