(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
Dear Sreekanth, I am delighted to go through this site. found very informative and to the point.
My wife died intestate leaving few house sites in her name, that were bought in the period from 1994 to 2011..I and my two sons are her legal heirs. Ultimately I/we will be disposing of those plots.My sons would like to relinquish/gift their portions through a deed ,so that I may inherit the plots entirely. I am in the high income bracket. If I sell these plots at a later date say with in a year of relinquishment by my sons, what will be the tax implications ? be As I will be selling with in a year after their relinquishment/gift of their inherited portions will it be STCG OR as these plots were bought many years earlier (by my wife) and 1/3 portion was inherited directly and 2/3 portion was obtained as gifts/relinquishments prior to disposal will it be LTCG?
The other route is that each of us inherit their 1/3 portions individually by patta transfer with death certificate and Legal heir Certificate initially for each and every house site and and sell them plot wise. Tax implications will be different for each one of us.
Will you please guide us, so as to minimize the tax outflow and the relative merits and demerits of the options available?
Thanx in advance
Thank a lot dear
Dear Ganapathy ji,
In this case, it is LTCG only.
Kindly note that for calculation of capital gains, cost of acquisition borne by previous owner / donor (your wife) is treated as purchase price, for you or for your sons (whether it is after relinquishment or a direct sell by three of you).
In case, three of you sell your respective shares in the properties, all of you have to bear the taxes on LTCG (if any).
If 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 original cost of acquisition, this can reduce your net LTCG. You can also claim any indexed cost of improvements done to maintain these properties.
Suggest you to kindly go through these 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
Nominee Vs Legal Heir : Who will inherit (or) own your Assets? | Importance of WILL
Advisable to consult a CA in this matter!
Dear sreekanth
Thanks for this article. I have a query. My grandfather had got a property from his father and he doesn't know on what cost his father would have purchased the property. So what cost of property we should take for ltcg calculation. Secondly we also don't have details of cost of improvement he did on this property. It's a more then 100years old property. Please advise. Thanks
Dear Archana,
If 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 original cost of acquisition.
Plz provide
Section and strong case law under which this FMV concept applied..
In my case i got immovable property gift from my father in 2010, the same property my father also got gift from my grandfather in 1995, and my granfather also got such property in 1925..
We do not know the value.
Now i sold property in 2016.
On point of IT officer the cost of such peroperty is zero.
As he state that my previous owner also got such property in gift so cost for him is also zero..
We when get property as gift in 2010 does government value as per 1981 and apply cost index on such govt approval value..and calculate tax and paid ltcg
But officer not agree
Pls provide case for this type of situation
Dear Sandesh,
Did you get any Scrutiny notice now from the IT dept?
Till Financial year 2016-17, the base year used to be FY 1981-82.
So, if you have sold the property in FY 2016-17, I believe that you can take the FMV of property as of 1981.
You may kindly consult a CA as well!
Dear Sreekanth,
My uncle purchased land on Oct 1977 for the value of Rs. 2000 area 266 sq. yards, and he gifted her daughter on Nov 2006 (value of during gift: Rs.6,35000), after gift, daughter invested in the property Rs. 10,000,00, now planning to sell the property aprox. Rs. 95,00,000, how much tax we can pay at present? It will be appreciated if you will give some aprx. value
The location of property will be Chandanagar near BHEL, Hyderabad
Regards
Pavan Reddy
Dear Pavan .. Suggest you to kindly consult a CA for tax calculations.
The purchase price for donee/receiver of gift is ZERO. So, for calculation of capital gains, cost of acquisition borne by previous owner / donor (Uncle) is treated as purchase price. Cost of acquisition can be taken as Fair market value of land as in 2001 instead of price as in 1977.
You can also show indexed cost of improvement for Rs 10 Lakh.
gifted only part of the property around 110Sq yards
My father has agriculture land in ALigarh district in Uttar pradesh. Most of the this agriculture land gifted my grand father and some parts my father purchased own. SO i just want to know that if my father sell this property then is it taxable? or if it is taxable then what we can do for exempted.
Dear AKhilesh,
Kindly read : Agricultural land & tax implications
Myself and my wife joint names purchased a property in 2001 at 6 lakhs. Subsequently we constructed first floor In 2013-14 at 16 lakh. I relinquished my rights in April 16 thro' a registered release deed. Now, before 31st march 2018 she wants to sell the house at 50L. My query is whether it attracts capital gains tax. How much tax it attracts or this amount can be invested on bond or this can be invested on another property as she has already a flat in her name. Thank you.
Dear srinivas,
This is a tricky one! Ideally, you could have executed Gift deed, in such case, the entire transaction can be subject to Long term capital gains only.
In case of Release deed, the tax on capital gains (like in Sale Deed case) is applicable but only on the portion of the property that you relinquish. This can be STCG.
Was the release deed done for any consideration?
Suggest you to kindly consult a CA in this matter..
Dear Sreekanth, this article has opened by eyes to some new knowledge that I wasnt aware of: "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.)"
My parents had built their house in 1986, and we sold it in 2017. Until now I was thinking that we just need to multiply the cost of acquisition with 2.72 to arrive at the indexed cost, and it was hardly any value at all. Now that I read that I need to ascertain the FMV of the property in 2001, I have a fresh lease of life.
Can you refer any govt approved property valuer for me please? I'll be very grateful.
Dear Sandeep,
Higher the cost of acquisition, lower would be your net capital gains and hence lower would be your tax liability (if any).
You may have to find a Surveyor in your locality. You may check with any trusted civil lawyer/CA/Real estate agent for references (or) through Google!
can we claim cost of stamp duty & registration fee as cost of acquisition in case of gifted property when we sell that property.
Dear Pritam,
As far as I know, it can be claimed as part of Cost of acquisition.
Hi,
This is Abhijit
Query is
I have a property (Flat) in Maharashtra which I want to gift to my Monther. I am living abroad since last 5 years and do not file tax returns in India.
6 years have got completed after purchase of this property & Mother will not be selling this property for long term and after her it will come again back to me.
1. Will this attract any capital gain tax.
I feel not as there will be no financial benefit out of this deed.
2. After mother when this gets transferred to me 100 % or partial as per mothers will or by default. Will it attract any tax.
3. If I want to sell this property after my mother if this will attract any tax, if yes on what price.
Thanks in advance for your reply
Dear Abhijit,
1 - No.
2 - No.
3 - Yes. The purchase price (cost of acquisition) in this scenario would be, your original purchase price (6 years back price, given in your registered Sale Deed).
Related articles ;
Gifts & tax implications!
Nominee Vs Legal heirs
Dear Sir
I have one query related to same
Hi My Question is
1. My Grandfather bought property in 1954, built a home on it.
2. He willed this property to my cousin, and died in 2004, so my cousin inherited this property.
3. My cousin gifted me this property in Nov 2016. i paid stamp duty as it was not blood relation (valuation was 24 lakhs).
4. I sold this property in 2017 for 24 lakhs.
My question is
a. As it was gifted to me and i paid stamp duty do i need to pay tax on it.
b. I sold property on same rate on which i gift deed was made, i.e. 24 lakhs. Will i incur any capital gains. will it be STCG or LTCG
Dear mayank,
1 - Tax on capital gains received on sale of property is applicable in case of Gifted or inherited properties too.
2 - In your case, it can be LTCL / LTCG, If the purchase price with indexation is more than the sale price then you may be making capital loss, else capital gains.
For calculation of capital gain the cost to the previous owner (donor ie your grand father) is considered as the cost of acquisition of the Property.
Thanks, also i need to pay tax as its Gift deed without blood relations
Dear Mayank..Yes, you are correct.
Kindly read : Gifts & Tax implications.
Suggest you to kindly consult a CA.
My father died and my mother is with us. We are two brothers. My brother has a daughter, and I have two sons.
With the consent of my mother me and my brother wish to sell a ancestors house property which was 100 yrs old built by my grand father, and house plot purchased by our father in 1969 for Rs. 2000/-.
So far we have not divided the property.
If the house is sold, my mother says that the money can be passed on to her grand children. Ie. My brother's share to his daughter and that of mine to my two sons.
As regards to plot, we decided to share between mother, me and my brother..
This also me and brother want to give to our children. My mother may gift her money later to children.
Please educate us on tax implications on the sale of these properties.
I am a pensioner and tax payer. My brother also retired and his income is under tax limits. My mother 85 yrs) gets my father's family pension, but with in the tax limits
Dear Ravindranath ji.. Kindly refer to our discussion on Forum ..