(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..
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.)
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.
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.
| Particulars | Amount | |
|---|---|---|
| Total Sale Price (Full value of consideration) | xxx | |
| Less | Expenses related to Sale / Transfer | xxx |
| Less | Indexed Cost of Purchase | xxx |
| Less | Indexed Cost of Improvement | xxx |
| Gross Long Term Capital Gains | xxx | |
| Less | Capital Gains Tax Exemptions under Section 54 series | xxx |
| Net Long Term Capital Gains on Sale of Gifted or Inherited Property | XXX |
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 ;
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.
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.
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.)
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;
| Section 54 | Section 54EC | Section 54F | |
| Who can claim the exemption? | Individual / HUF | Any person | Individual / HUF |
| Asset sold / transferred | Residential Property | Any long term capital asset | Land / Plot (other than Residential house) |
| Minimum Holding period of Original Asset | 2 years | 2 years | 2 years |
| New Asset to be acquired | One or Two Residential house(s) (Two houses if LTCG is less than Rs 2cr) | Notified Bonds | Residential house |
| Time limit for new investment | Purchase : 1 year backward (or) 2 year forward. Construction : 3 years forward. | within 6 months | Purchase : 1 year backward (or) 2 year forward. Construction : 3 years forward. |
| Exemption Amount | 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.
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(Post first published on : 12-June-2017) (Image courtesy of Stuart Miles at FreeDigitalPhotos.net)
This post was last modified on September 21, 2023 11:34 am
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View Comments
Sir,My mother have gifted her self earned property to my sister in 2014 through an registered gift deed.. Now my sister has found a buyer,My question to u is the purchaser now wants my mother (donor) and my sister's husband and her adult son to be an consent witness while executing the sale deed....1) please tell me is it mandatory for these people to be consent witnesses..2) tell me is there an other options to execute the sale deed..3) Do my sister has absolute right to sell her gifted property without taking the above said consent witnesses..
Dear Vijay,
1 & 2 - It is not mandatory but the Seller may be trying to be 'extra cautious'.
3 - Yes she has absolute right.
Related article : How to save Capital Gains Tax on Sale of Land / House Property?
Hi Sreekanth my case is kind of similar to the example you have mentioned. I would like to sell a house that i have received as gift. Holding period is less than 2 years. Am unsure if it is STCG or LTCG.
My understanding is that this issue has been subject to litigation. Do you have any recent case law etc supporting your conclusion ?
"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 (2016) 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."
Thanks
Dear Ani,
When did the original owner (donar) acquire the property?
The matter that is mostly subject to conflicting Court orders is 'Allotment date Vs Registration Date/Possession date' for an under-construction property.
Hi Sreekanth....the house was purchased jointly (donor was 1/3 owner) in Oct 2000. Donor became sole owner when other joint owners relinquished their rights in Dec 2013...
The reason i mentioned this aspect being subject to litigation was based on this article:
Moneycontrol.com
Dear Ani,
In the mentioned article, kindly go through the last paragraph again :'
"In view of the findings of the Honourable judges in the above case one can definitely come to a conclusion that 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."
Hence, in your case, the gains (if any) will be considered as Long Term Capital Gains.
Related article : How to save Capital Gain Tax on sale of Property?
Dear Sreekant,
My Grandmother and Mother jointly held a residential property bought in 1990 for 2.8 Lacs which they gifted to my brother in 2015 and he is planning to sell the same now. Would there be any capital gains tax for the same or is it exempt in the case of a gifted property?
Dear Pranav,
When you brother received Gift, that transaction is a tax-free one.
But, Long term capital gains (if any) realized by your brother now will be subject to taxes.
Related article :
* Got a Gift? Find out, if it is Taxable or Tax-free?
* How to save Capital Gains Tax on Sale of Land / House Property?
My wife has inherited 30 cents of land in 2008.This property was gifted to her by her mother,who had also inherited it from her mother(wife's grandmother) Now she is selling ten cents from it at 20 lakhs.How to calculate capital gain tax,please advise.
Dear Dileep,
As the year of acquisition was before FY 2001-02, the purchase price (for 10 cents) can be considered at ‘Fair market value (FMV)’ of that property as on 1st April, 2001, instead of cost of acquisition by the original owner.
Related article :
How to save Capital Gains Tax on Sale of Land / House Property?
My father had bought commercial shop property in mumbai in 1968( whose sale deed and property card not there with him or not made not aware ). Although property tax electricity ,water bill in dad name. In 2000, my father through will made myself and one brother owner of shop. In 2008 my father died. Now myself and brother wants to sell property what document do we require to sell property ( as sale deed ,property card document not there)
Dear Rahul,
You may kindly visit the concerned Sub-Registrar Office and apply for a True certified copy of Sale Deed & also get latest EC.
Based on the WILL, copy of Sale deed, EC, death certificate, Family tree document etc you can Sell the property. (I am assuming this is not an Ancestral property).
You may also try to get the Property Mutation done on to your names at local Civic body office (Corporation..)
Kindly read :
* Lost your Property Documents? How to apply for Certified Copy of lost Sale Deed?
* Importance of EC
* What is Mutation of Property? How to apply for Mutation of Property?
* What is Ancestral Property? | Definition & Important Legal rules
Sir,I would like to sale my house which is given my family members ( mother, brothers & sisters) after the death of my father for Rs.3 Lakhs in the year 2000. Is this will comes under inherited? What will be the tax liability on sale of this property? I am salaried in a pvt ltd company and filing my IT return regularly. please guide me how to i act. Thanks.
Dear ANISH,
Did they execute any Document like Gift Deed or Relinquishment or Settlement Deed? Under whose name was the property previously held?
Dear Sreekanth,
In 1974, my father bought some land from his nephew and he was also gifted some additional contiguous land by his mother so that a house could be built. My father passed away in 2010 and as per his will , all his assets were passed on to my mother, including the house . Now my mother wants to gift a portion of that land to me. Once that is done, if I have to sell the land gifted to me, immediately, how do I calculate Capital Gains?
Dear Venugopal,
Date of acquisition by original donor is considered as the Date of Purchase. So, kindly note that the date or year of inheritance / receiving the gift are of no importance in Capital Gains calculation.
As the acquisition date (for donors) 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.
Suggest you to kindly consult a CA.
Related article :
How to save Capital Gains Tax on Sale of Land / House Property?
My son purchased a property in Oct 2017 wherein i gifted an amount of Rs 45 lacs. The property is registered in his name. In sept 2018 I sold a property and have capital gain of Rs 45 Lacs which i need to either pay tax on or invest in a new property> I have already utilized bond upto 50 lacs. My question is if today my son transfer 50% share to my name in the property which he purchased as i had given him 45 lacs gift, can i reflect this amount to claim exemption in LTCG.
Dear RAJESH,
I have already utilized bond upto 50 lacs - But you have only Rs 45 lakh as LTCG and you have already invested in Bonds ????
Gifting may not be eligible for tax exemption. You may kindly consult a CA as well.
Related article : How to save Capital Gains Tax on Sale of Land / House Property?
Sir, need to ask one thing.
My cousin stays abroad and was nri in 2008 when he bought the flat in karnataka. Now he got london citizenship and is not even having an Indian Pan card.
Now he plan to sell the flat.
How much TDS needs to be paid. I heard its 20%+ taxes =total 23.6%
Can he gift it to his dad who is indian citizen and have Pan card also.
Anyways that only 1% Tds is deducted.
Thanks in advance.
Dear Jatin,
As per FEMA rules on acquisition and transfer of immovable property, an NRI can transfer an immovable property (even by way of a gift) to a person resident in India.
Also, from an income tax perspective, if the relationship is that of father - son , the clubbing of income provisions in case of Income Tax will not be applicable. The cost of acquisition of property for your Uncle will be the cost of acquisition for your Cousin.
Kindly consult a good civil lawyer/CA.
Related article : Got a Gift? Find out, if it is Taxable or Tax-free?
I bought a Apartment recently jointly with my wife. Have taken a joint home loan for that. I am staying in new apartment bought for self use. I have another house in my sole name ( Inherited land from father on which house construction done by me 10 years back) which is let out and rent I am declaring in my ITR. My query is I have a plot of mine bought 12 yrs back. If I sell that can I utilize Capital Gains entirely to repay my Home loan to reduce Home loan. Now as it's not my only home I read that benefits of Sec 54 not applicable. In that case can I gift my site to my wife and then she uses proceeds to prepay loan. This is what my CA advises. I am aware it can be done only within 1 year of buying new house. Please guide
Dear Sudheer,
If you have bought the house 1 year back from the date of proposed sale of plot then you can claim the exemption.
However, you should not own more than one residential house prior to this investment to claim exemption u/s 54F.
I believe that your CA's is a good one.
But, in case, you receive a scrutiny notice, you/your CA may have to justify...
Related articles :
* How to save Capital Gains Tax on Sale of Land / House Property?
* Long Term Capital Gain Exemptions on Sale of Property & Recent Court Judgments