(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.
Continue reading :
(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 Srikanth,
Appreciate your blog regarding on the tax implications which is very useful for readers.
I have on one query,
My parents have one house property in their name and I got one gifted house property on April 2017 from my mother where it was gifted by my father last year June 2016.I am staying with my parents now,where the gifted property was locked not rented to anybody as of now from gifted date.I would like to know whether i need to declare this as rented house property and also mention as gifted property in upcoming it returns...
Dear Srinivasan,
If you have plans to let it out then you can declare it as let out property kept vacant for entire year (if kept vacant for full year) ..it depends on your plan.
Are you a salaried person? Are you claiming HRA?
You can disclose the value of Gift (property) in the ITR under 'exempt income' section.
Kindly read :
Gifts & tax implications
Sale of inherited or gifted property & tax implications
Yes I am salaried person (unmarried) living in my parents own house and holding only the gifted property in my name. Also I am not claiming any HRA...but if we keep vacant do I need to declare any unrealized rental income....
Dear Srinivasan ..You can declare it as let out property kept vacant and in this case 'rental income' would be nil.
Kindly read : Income from house property & tax implications..
I am writing this as no comment field is there in "Got a Gift? Find out, if it is Taxable or Tax-free?: ".
My question is if an assessee receive gift in from of bank transfer by cheque or NEFT from relative (as per IT act, 1961), Do we still need gift deed or not. Here, Tax practicing person keep on asking for gift deed.
Can i make declaration on simple white paper as gift deed. (just for evidence as both are relative say brothers)
Dear Dixit ..It is not mandatory to make a gift deed, but advisable to have it..
Hi Sreekanth,
I have a query regarding the cost of acquisition for the sale of gifted property.
As the person receiving the gift is also paying stamp duty and registration charges for the gifted property, can this amount (stamp duty plus registration) also be added to the cost of acquisition? If so, can this amount also be indexed (from the year of gift to the year of sale)?
Thanks.
Dear Avanish,
Very good question!
I believe that there is no clarity on this!
As far as I know, it can be claimed as part of Cost of acquisition.
Can I buy 2 houses after selling one house and still get tax exemption.
Dear Mr Rao,
Kindly note that you are allowed to purchase or construct only one new asset from the capital gain that accrues. This means that you cannot make multiple property acquisitions and thus seek to reduce your tax outgo. However, if you sell more than one property, you can invest the resulting cumulative capital gain amount in a single new property.
Kindly read : How to save Capital Gains tax on sale of Property?
Sir
My query is i have purchased an flat in pune and am residing there and the same is self occupied by me. In the month of March 2017 my father gifted me his property which is again an residential property in Bangalore which is occupied by my parents. Now i intend to sell the property in Bangalore and purchase an new flat as well. Will i be able to claim exemption for the same as i was told if i already have an residential property i shall not be entitle for the exemption. Please clarify regarding the same.
Thanks
Dear Mr. JOSHI ..Suggest you to kindly go through this article, and revert to me if you need any more details..
Very nice post. Really helpful
Hello Srikanth,
I have a question around income from house property tax planning. I have found the relevant article (https://goo.gl/9ncybf) however I couldn't get the option to post the comments. Hence posting my question against this article. Please help.
I have two flats on my name, For the 1st one home loan is closed and which is self-occupied where I am staying with my spouse and parents. 2nd flat is on rent for which SBI Maxgain home loan is going on. Since last year I am unable to take the tax benefit 2nd flat home loan as much as I wanted because the yearly rent I receive is more than the home-loan interest(even after deducting Municipal taxes and std. deductions from rent). Hence my income from house property is coming as +ve. I have parked my surplus money (50% of the outstanding loan amount) in my SBI Maxgain loan account which I have kept as contingency fund, or for any new investments and to also reduces the interest out go from monthly EMI. What options I have to save/avoid tax on rental income in this case?? Can I show the 2nd Flat as Self-Occupied and take the benefit of Home Loan Interest component? and transfer 1st flat on my spouse name (who doesn't have any other source of income) paying agreement cost, society charges etc.? Please advise what is feasible and beneficial in this case.
Dear Hanumanth,
For time-being, we have de-activated blog comment feature on posts which are older than 365 days.
Whether it is a self-occupied or let-out, the maximum tax benefit that one can now claim is Rs 2 Lakh only under the head 'income from house property'.
I am unable to understand your logic.
If your tenants in second property are paying you rental income (if by non-cash mode) and if they in-turn are claiming their HRAs, then kindly declare it as let-out only.
Thanks Sreekanth for responding. I am showing my 2nd property as let-out and adding the rental income to my income from house property, my logic was to transfer the 2nd property to my spouse or parent name so that the rental income will go to her and would be still under tax exemption limit. Is that a good idea? Will this attract any capital gain tax implications? Thanks.
Dear Hanumanth,
If you gift the property to your spouse, as per clubbing of income provisions, the rental income would still be added to your income and taxable.
Clubbing of income is not applicable if you gift the property to your parents.
Kindly read :
Gifts & tax implications.
5 ways of transferring your real estate property!
Thanks a lot Shrikanth. My all questions are answered now and I have realized that there is no way I can save tax to be paid on the rental income of 2nd property. Thanks for your help and shared link around this.
Sreekanth,
Kudos to your work..Keep it up!
I have a doubt. I have an inherited share from my Fathers property. Should I purchase a Residential Property or can I Purchase a land on the share I have received.
I don't intend to construct a house on that land I purchase, its just for investment. Could you clarify.
Dear Ajith,
If you invest in only Vacant land then no Tax exemption is available.
Kindly read : How to save tax on LTCG on sale of property?