(Updated on 20-Sep-2023)
Capital asset typically refers to anything that you own for personal or investment purposes. It includes all kinds of property; movable or immovable, tangible or intangible, fixed or circulating.
Examples include a house, land, household furnishings, stocks, bonds or mutual funds held as investments etc.,
When you sell a capital asset, the difference between the purchase price of the asset and the amount you sell it for is a Capital Gain or a Capital Loss. Capital gains and losses are classified as long-term or short-term depending on the ‘holding period’. Taxes on capital gains are applicable.
For example : You buy a residential plot for Rs 5 lakh in 2000 and sell it for Rs 12 lakh in 2023 then you are making capital gains of Rs 7 lakh. You need to pay taxes on these capital gains.
Not all the times you buy / invest in capital assets like immovable properties. Sometimes you may inherit the properties from your parents / relatives, you may also get the properties through a WILL (or) you may be lucky enough to receive properties by way of Gifts. (Read : ‘Got a Gift? Know if it is taxable or tax-exempt?‘)
Property received on inheritance or through Gifts from family members are tax-exempt. At the same time, you (inheritor / Donee) are receiving them without any consideration. For example : Your father can gift you a house. Here, you are not paying anything to receive it.
Now, let’s say you would like to sell this gifted property for certain amount. In this case, your purchase price is NIL. Does this mean you do not have to pay any taxes on sale of gifted property? How are capital gains calculated in case of a Gifted property? What would be your Cost of acquisition (purchase price)? Are capital gains taxes applicable on sale property which is inherited? Is it possible to claim tax exemptions on capital gains on sale of gifted property? .. Let’s discuss..
Types of Capital Gains
If Land or house property is held for 24 months or less then that Asset is treated as Short Term Capital Asset. You, as an investor will make either Short Term Capital Gain (STCG) or Short Term Capital Loss (STCL) on that investment.
If Land or house property is held for more than 24 months then that Asset is treated as Long Term Capital Asset. You will make either Long Term Capital Gain (LTCG) or Long Term Capital Loss (LTCL) on that investment.
(As per Budget 2017-18, Holding period for Long term capital gain for all immovable properties has been reduced to 2 years from 3 years. This is with effective from Financial year 2017-18 or Assessment year 2018-19.)
How to calculate Capital Gains on sale of Gifted property or inherited immovable property FY 2023-24?
Short Term Capital Gains on Gifted property is calculated as below:
STCG = (Total Sale Price) – (Cost of acquisition) – (expenses directly related to sale) – (cost of improvements).
Here, the cost of acquisition for the inheritor or receiver of the gift is NIL. But, for calculation of capital gain the cost to the previous owner (donor) is considered as the cost of acquisition of the Property.
Short Term Capital Gains are included in your taxable income and taxed at applicable income tax slab rates.
Long Term Capital Gains Calculation;
The LTCG calculation is similar to STCG. The only differences are, you are allowed to deduct Indexed Cost of Acquisition/Indexed Cost of Improvements from the sale price and also claim certain exemptions to save tax on long term capital gains.
|Total Sale Price (Full value of consideration)
|Expenses related to Sale / Transfer
|Indexed Cost of Purchase
|Indexed Cost of Improvement
|Gross Long Term Capital Gains
|Capital Gains Tax Exemptions under Section 54 series
|Net Long Term Capital Gains on Sale of Gifted or Inherited Property
Let us understand this with an example;
Mr Amitabh purchased a property on 1st Jan, 1989 for Rs 1 Cr. He then gifts the property to his son Mr Abhishek in 2022, however he decides to sell it for Rs 10 Cr in Sep, 2023. So, how are capital gains calculated on the gifted property?
Let’s understand this step by step ;
1) Type of Capital Gain
We need to identify the type of capital gains based on the holding period. The holding period of asset by Abhishek is around 1 year. Does this mean the gains can be categorized under STCG? – No.
Date of acquisition by donor (Amitabh) is considered as the Date of Purchase. So, kindly note that the date or year of inheritance / reeving the gift (2022) are of no importance in this calculation. Year of acquisition by previous owner (Amitabh) is 1989. So, the capital gains on sale of gifted property are treated as long term capital gains for Abhishek.
2) Date of Acquisition of Gifted or Inherited Property
We need to then know the cost of acquisition (purchase price). As Abhishek has got this as a gift, the purchase price for him (donee/receiver of gift) is ZERO. So, for calculation of capital gains, cost of acquisition borne by previous owner / donor (Amitabh) is treated as purchase price. In this case, it is Rs 1 Cr.
3) Indexed Cost of Purchase
For calculating long term capital gains, the seller of immovable property can claim indexed cost of acquisition.
Indexation is done by applying CII – Cost Inflation Index. This increases your cost base i.e., purchase price and lowers your gains. Your purchase price is adjusted for the impact of inflation.
How do you calculate the indexed cost of purchase/improvement? The indexed cost is calculated with the help of a table of cost inflation index. Divide the cost at which you purchased the Property by the index as on the date of the purchase. Multiply this by the index as on the date of sale.
Below is the Cost Inflation Index Table from 2001-02 to FY 2023-24 for your reference. Cost Inflation Index (CII) for FY 2023-24/ AY 2024-25 Notified by CBDT at 348.
The confusion would be, whether you can claim indexation from the year in which you received the gift or from the year of acquisition by donor? – As discussed above, the year in which you have received the gift is not used for calculation.
Let me explain to you what is indexation, its benefits and how it is calculated, by continuing with the above example…
The purchase year is 1989 and year of sale is in Financial Year 2023-24. The cost of acquisition in 1989 was Rs 1 cr. As the year of acquisition was before FY 2001-02, the purchase price can be considered at ‘Fair market value (FMV)’ of that property as on 1st April, 2001, instead of cost of acquisition. (You can get the FMV details of a property from a Govt approved Property Valuer.)
So, the Indexed cost of purchase = (FMV / 100) * 348.
(Till Financial year 2016-17, the base year used to be FY 1981-82. To calculate the capital gains at the time of selling any property purchased before 1981, its purchase price is now calculated on the basis of the fair market value of 1981. Calculation at the fair market value of 2001 will increase the cost of acquisition and lower the capital gain.
W.e.f FY 2017-18, the base year for calculation of Indexation is going to be 2001-02. It will have an affect (mostly positive) on investments where indexation benefit is available when calculating Capital gain taxes.
For example: Suppose you are holding on to your investments made in debt funds or Property before 2001, the Fair Market Value (NAV) as on 1 st April, 2001 will be considered as cost of acquisition for calculating capital gains. This will help the investor to reduce the capital gains taxes.)
4) How to Save Capital Gan Tax on sale of an Inherited or Gifted Property?
You have a provision to claim certain exemptions on Gross LTCG on sale of inherited or gifted property. Below are the tax saving options on long term capital gains realized out of sale of gifted or inherited property;
|Who can claim the exemption?
|Individual / HUF
|Individual / HUF
|Asset sold / transferred
|Any long term capital asset
|Land / Plot (other than Residential house)
|Minimum Holding period of Original Asset
|New Asset to be acquired
|One or Two Residential house(s)
(Two houses if LTCG is less than Rs 2cr)
|Time limit for new investment
1 year backward (or)
2 year forward.
3 years forward.
|within 6 months
1 year backward (or)
2 year forward.
3 years forward.
|Investment in the
new asset (upto Rs 10 cr)
or capital gain,
whichever is lower
|Investment in the
new asset or capital gain,
whichever is lower (max Rs 50 Lakh)
|(Long Term Capital Gain * Amount invested in new house of upto Rs 10cr)
divided by Sale proceeds of original asset ie Net consideration
Once you adjust the tax exemption (if any), can arrive at the ‘Net LTCG’. Long Term Capital Gains on sale of house or plot are taxed at 20%, with indexation benefit as explained above.
To sum it up, whenever certain assets are sold and particularly when such assets have been received by way of gift or through Will or by succession or by inheritance, then the cost of acquisition of the asset will be deemed to be the cost for which the previous owner of the property acquired it, as increased by the Cost Inflation Index of that year in which the previous owner originally acquired the property.
Continue reading :
- Property Gift Deed – All you wanted to know!
- Capital Gains Tax Exemption Options on Sale of House or Plot | AY 2024-25 Latest Rules
- What is an Ancestral Property? – Important Legal rules
- 5 ways of transferring your Immovable real-estate property!
- Latest Court Judgements on Women’s Property Rights
(Post first published on : 12-June-2017) (Image courtesy of Stuart Miles at FreeDigitalPhotos.net)