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Business News/ Money / Calculators/  Capital gains from sale of inherited property is taxed
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Capital gains from sale of inherited property is taxed

LTCG can be claimed as exempt from tax by reinvesting the gains in one new residential property located in India

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I inherited a property about a month back and I want to sell it now. What will be the tax liability? Also, if I am planning to buy a new property, what is time period within which I should make the purchase so that there is minimum tax incidence?

—Gagan

The capital gains, if any, on sale of inherited property shall be taxable in your hands. The capital gain taxability in respect of property depends upon the period of holding of the property.

If the property has been held for more than 36 months from the acquisition date, then the resulting gains, if any, are termed as long-term capital gains (LTCG).

In case of inherited property, the period of holding is counted from the date of purchase of property by the original owner who has actually acquired the property, other than by way of inheritance and gift.

If the aggregate period of holding is more than 36 months, any gains are termed as LTCG.

LTCG is computed as difference between net sale proceeds and cost of acquisition or improvement. While calculating LTCG, the cost of acquisition and improvement, if any, should be adjusted by applying the cost inflation index notified by the tax authorities in the year of purchase/improvement and sale, respectively.

For this purpose, the cost of acquisition shall be the cost at which the original owner who has actually acquired the property, other than by inheritance and gift, as increased by cost of improvement made subsequently. If the property has been 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 as on 1 April 1981.

LTCG can be claimed as exempt from tax by reinvesting the gains in one new residential property located in India, as per section 54 of the Income-tax Act, 1961. The investment has to be made within the specified time frames, i.e., within one year prior to sale date or two years from the sale date or within three years for an underconstruction property.

If you are unable to reinvest the LTCG into new house before filing the tax return for the financial year (FY) of sale of house, then the unutilized balance LTCG should be deposited into the Capital Gains Account Scheme (CGAS) before the due date of filing your personal tax return.

The amount deposited into CGAS should be utilized for purchase of a new house within aforesaid time frames. If you are unable to do so, the unutilized amount shall be taxable as LTCG in the FY in which three years from sale of old property lapse.

You can also invest it in specified bonds issued by, say, the National Highways Authority of India or Rural Electric Corp Ltd, under section 54EC.

Investment should be made within six months from sale date of property subject to threshold of 50 lakh and fulfilment of specified conditions.

Accordingly, the balance LTCG, if any, shall be taxable at 20%. Additionally, if the total taxable income during the FY exceeds 1 crore, then a surcharge at 12% shall be applicable on the basic rate (i.e., 20%). Further, an education cess of 3% on basic as well as surcharge (if applicable) should be levied.

However, if the aggregate period of holding of the property is less than 36 months, then the gains, if any resulting from sale of property shall be termed as short-term capital gains (STCG).

The STCG is computed as difference between the net sale proceeds and cost of purchase/improvement. However, you will not be eligible to avail the aforesaid exemption from STCG. Accordingly, the entire STCG shall be taxable in your hands at applicable income tax slab rates. Further, surcharge, if applicable and education cess at 3% shall also be levied.

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Published: 08 Jul 2015, 05:32 PM IST
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