From inheritance to investment: Key tax insights for heirs

There are three legal heirs of my father's 40-year-old residential property: two brothers and one sister. My sister does not want any share, so the two brothers will divide it equally. We plan to sell the property either as-is or after constructing additional floors. I already own a residential house in joint names with my wife, as well as a commercial property and some plots. My questions are: (i) What will be the date of acquisition of this property for me? and (ii) If we sell the entire property and I buy a new house with my share, can I benefit from Section 54?

—Rajiv Gupta

The date of acquisition for the property inherited by you from your father will be the date on which your father had purchased the property. The cost and date of acquisition for a capital asset acquired under a will or as a gift, will be the cost and the date for which, and on which, the previous owner acquired it. 

In the present case, as your sister wishes to relinquish her share of the property, it will devolve upon the remaining legal heirs, that is your brother and you. On the other hand, if she wishes to give up her share in the property after the will has been executed, she can gift it to you and your brother, and such gift will neither be taxable in her hands nor in your hands.

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Taxation

If the property was acquired prior to 1 April 2001 by your father, you can consider the fair market value as on such date as the cost of acquisition, if such fair value exceeds the actual cost. Similarly, if you are a resident, you have an option to compute the capital gains at the rate of 20% (plus applicable surcharge and education cess) with indexation, or 12.5% (plus applicable surcharge and education cess) without indexation, as the property has been acquired prior to 23 July 2024.

Any costs incurred for constructing new floors would be considered as the cost of improvement by you and your brother, which would also be available as deduction while computing the capital gains.

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If you sell the property and acquire a new residential house one year before or two years after the transfer of the original property, capital gains would be exempt under section 54 to the extent reinvested in purchasing the new residential house. Section 54 exemption is available on sale of a residential house irrespective of the number of properties owned by you at the time of such sale, unlike section 54F which allows exemption only if you do not own more than 1 property (other than the property being acquired). Therefore, the fact that you already own another residential property or commercial properties and plots would not have a bearing on the exemption for the sale of the inherited property.

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However, you need to be mindful of the fact that while the option of paying tax at the rate of 20% after indexation is permissible, for the purpose of computing the exemption under section 54, the gains without indexation will be considered.

—Mahesh Nayak, chartered accountant, CNK & Associates

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