If the property that has been sold was held for more than 2 years, gains from its sale shall be treated as long term capital gains
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My son is a US citizen and owns a residential property in India, which he acquired before moving to the US. He now wishes to dispose it. We are not sure of the taxes and the overall impact due to the sale of this property. Let us know how to go about with the tax planning and reduce the overall tax burden. Also, what are the implications of gifting of property to his sibling in India.
—Name withheld on request
If the property that has been sold was held for more than 2 years, gains from its sale shall be treated as long term capital gains. However, where the property was held for less than 2 years, the gains shall be treated as short term capital gains. For the purpose of calculating long term capital gains, cost is allowed to be indexed. Any improvements made to the property can also be indexed. This indexed cost can be subtracted from the sale price to arrive at capital gains. Long term gains are taxed at 20% (including additional cess and surcharge as applicable). Short term gains can be arrived at after reducing the cost from the sale price. Short term gains shall be taxed according to the slab rate applicable to the taxpayer.
You are allowed to claim exemption from capital gains by investing your capital gains in purchasing a new residential house as per conditions laid down under section 54 of the Income Tax Act. Under this section, a new residential property must be purchased either one year before or two years after or a new property must be constructed within three years from the date of transfer of the property being sold. You must not sell this newly acquired property within three years of purchasing it.
You can also claim exemption from capital gains by investing your capital gains in specified bonds within six months from the date of transfer of the property being sold as per Section 54EC of the income tax act. However, a maximum of ₹50lakh can be invested in these bonds in one financial year. Additionally, its important to identify if your son is a resident or NRI in India for tax purposes. Reference will have to be made to the DTAA between the two countries to make sure the benefits under the treaty are available to him so that he does not have to pay tax on the same income twice.
In case he decides to gift the property to his siblings, there is no tax implication for your son or his siblings since siblings are considered as specified relatives for the purpose of the Income Tax Act of India. Therefore, gifts made to siblings are not subject to tax in India.