(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
Hello Sreekanth ,
Your
I seek a clarification on a calculation of LTCG . A flat purchased by my grandmother in July'2003 for Rs 3,65,000/-. It was gifted to me on 16th Sept'2022. I sold it on 8th Dec'2023 for Rs 18 lacs ( Market value assessed :- Rs 18,96,615/- by the Sub-Register of the Revenue deptt of the State Govt). I arrived at the Indexed cost of acquisition and LTCG calculation as follows: 396000 x 348/109 = Rs 12,64,294. There is no improvement cost incurred by me except Rs 8000/- spent on transfer-brokerage during the sale in Dec'2023. Hence my taxable portion of LTCG is : Rs6,24,321/-(1896615 less 1264294 less 8000) for the FY2023-24(AY2024-25). Pls confirm that it can be treated under LTCG and I can keep this Rs 6,24,321/- under CAPITAL GAINS ACCOUNT SCHEME in a PUB.SECTOR BANK ( as per Sec:54 of the IT Act ) and invest in a new flat within 2 yrs from 8th Dec'2023 . I understand , if I do not invest in house property within 3 yrs from 8th Dec'2023 then the amount will be taxable under Sec:45 of the IT Act. Pls guide me.
Regards,
Tapan Basu.
Dtd:- 23rd May'2024 .
Hello Sreekanth,
Thank you so much for this wonderful post.
Please let me know if I'm right in calculating LTCG like this :
My sister bought a piece of land (4000 sq. ft.) in 2008-09 for 18L.
She gifted me the same in FY 2023–24, and I sold a part of this land (2500 sq. ft.) for 25L.
So,
Purchase Value (2500 sq. ft.) = 11,25,000
Indexed purchase value = Purchase value * (CII for the year of sale/ CII for the year of purchase) = 1125000*(348/137) ~ 28.5L
Long term capital gain = Sale value – Indexed purchase value
LTCG =25-28.5= -3.5L
If it comes negative!
Does that mean I don't have to pay any LTCG?
If Yes, then how do I calculate it?
Thank You Sreekanth.
Dear Awanish,
In your case, you are incurring Long Term capital Loss.
You can set-off the losses against LTCG from any other Capital Asset.
Sir, I want to sell the land gifted to me by my mother and use it for studying abroad. Will I have to pay taxes?
Dear Thomas,
Yes, the capital gains on such sale is subject to taxes.
Suggest you to go through the below article :
Capital Gains Tax Exemption Options on Sale of House or Plot | Latest Rules
Hi Sreekanth,
Thanks for the wonderful info through your detailed blogpost. I have query further to your post.
Say a father purchased a property in 1990 for 10 lakhs and then gifted the same to his son in 2020. Now the son sells the property for 50 lakhs. Lets say for ease of calculation LTCG is 40 Lakhs (although in reality would be lesser due to indexation). Now if the son purchases a property of 1 crore. In this case LTCG is lesser than the property price.
From 1 crore value of the new flat , son pays 40 lakhs from old flat sale and remaining 60 Lakhs either from his own savings or from a home loan.
So my query is :
1) Will the LTCG be exempt for him when he pays income tax
2) Will there be any LTCG on the remaining 60 Lakhs amount tht he pays additional to purchase the new flat?
Please advise .
Thanks in advance.
Sir
My chachi ( father's brother wife) received a gifted property from her parents which is owned in 1989. And then within a month my chachi gifted this property to my father. After Few days My father sells this property to another person. Is this come under long term capital gain or short term capital gain??
Sir my chachi received a gifted property from her parents. In the same month she gifted to my father(brother in law). And another month my father sells this property. Is this long term capital gain or short term capital gain.
Dear Srikant
Kindly advise. My case is as below
1. Residential house with 2 houses gifted to me by father in 2012.
2. Acquired in 1981 by father.
3. I am holding for 8 Yrs now
4. 2019 I entered into JDA. 4 units to be constructed. 2 Units will be my share.
My queries
1. Should i pay LTCG if i keep both the units without selling? If yes
will guidance vakue or FMV of 2 units be considered as revenue?
2. If i sell 1 unit should i divide the indexed purchase cost to arrive at 1 unit capital gain or consider total indexed cost minus revenue of 1 unit?
3. When i sell 2nd unit at later date, how is capital gain computed?
Looking forward to your response asap.
Dear SGR,
CG related to JDA can be very tricky.
Suggest you to kindly consult a CA.
Thanks very much Sir for your quick response. Really appreciate your support.
Would you be fine to provide professional guidance if i approach you and help in return filing?. May i know your contact details. I am in Bangalore.
Dear SGR,
We do not provide one to one ITR filing service.
Also, I am currently based in AP.
I have a plot in my name which is purchased in the year 2012. Now I would like to dispose and buy a new plot jointly in my name and my son in law what are the implications
Dear Mohan ji,
If you sell your plot for profit then you realize long term capital gains.
As you are planning to re-invest in a vacant plot, you can not claim exemption on LTCG.
You need to pay tax on LTCG.
You may go through below articles :
* How to save Capital Gains Tax on Sale of Land / House Property?
* Checklist of Important Property Documents in India | Legal Checklist for Property Purchase
Sir recently my father's brother gift registered land to my father which previously consisted of a house. my uncle held that house from 2002 and registered it to his other brothers in the earlier months of this year. Later in a very few days all 3 of them gave this land to a builder for constructing group house. Will this come to short term capital gain or long term capital gain. Please clarify
Dear soujanya,
As the sale has not happened there wont be any tax implications.
Did your father & uncles sell the land to builder?
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?
No sir
They made an agreement for constructing the building and what ever he earns or constructs will be shared on a 50 - 50 basis.
Dear soujanya,
In that case for your father/uncles, it is a Long term capital gains (if they sell the constructed Flats/houses allotted to them).
Suggest to consult a CA in this regard..
Actually they are planning to sell sir
One of my father's friend told him that this becomes a short term capital and he has to pay the tax along with his tax on the salary.
When we try to sell the flat will it become stcg or ltcg sir?
Dear Soujanya,
It depends on the clauses written in the Joint Venture Agreement.
I believe its LTCG. As suggested, kindly consult a CA.
Dear Sreekanth,
This article was extremely useful to me - thanks very much for posting it. Everything is very clearly explained and I have understood the method of calculating capital gains tax.
Only one question remains - about fair market value. I received a flat as gift from my father in July 2017. He had bought it in 1968 for an amount which I cannot trace, but definitely not more than 2-3 lakhs. Now I am selling it for Rs.3 crores in Nov 2019.
As per your article, the holding period is from 1968 to 2019, so it is long term. The cost of acquisition will be the FMV as on 01 April 2001. This is where I am stuck - how can I find that without going to a valuer? The property is in Mumbai, so can I take the ready reckoner value of April 2001 as the FMV? And then apply indexation on it (today's CII is 289).
Would greatly appreciate your clarification and advice. Thanks in advance!
Dear Jaykayess,
Yes, you can go by the ready reckoner, but advisable to also check with an authorized property valuer.
Related article : How to save Capital Gains Tax on Sale of Land / House Property?
Thanks again, Sreekanth, I will do so.