Capital Gain Tax on Sale of Inherited Property

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1 Immovable property received under a will or by way of inheritance does not have any tax liability. [Proviso to Sec 56(x)(b)]. A conjoint reading of sections 2(42A), 47(iii), 49(1), and 55(2) of the Act suggests that, in law, no “transfer” of a “capital asset” is considered to take place on inheritance and succession. It is only when the ultimate successor transfers the capital asset for consideration, the capital gains are assessed to tax.

In this article, an attempt has been made to simplify tax provisions on capital gain from the sale of Inherited Property with the help of Illustrations.

2. Holding Period The holding period in case of inherited property would be calculated from the date of acquisition by the previous owner. The date when the assessee received the property by way of inheritance has no relevance for ascertaining the holding period.

2.1. Illustration 1: Mr. Naresh acquired a residential flat from his father as a share of the inherited property on 2-1-2022. The said flat was originally acquired by Mr. F, his father on 29-1-1993 for Rs. 50,48,350. Mr. Naresh sold the said capital asset on 30-6-2022 for Rs. 1,90,00,000 and offered the long-term capital gains to tax.

2.2. Mr. Naresh is liable to pay tax @ 20% on LTCG (Long Term Capital Gain) as the holding period from the date of acquisition by the previous owner is more than 24 months.

3. Cost of Acquisition Where the capital asset became the property of the assessee by inheritance or succession, the cost of acquisition shall be deemed to be the cost for which the previous owner of the property acquired it. In the above Illustration, it is Rs. 50,48,350/-.

3.1 Where the capital asset became the property of the assessee before the 1st day of April 2001, the fair market value as of 01.04.2001 can be taken as the cost of acquisition at the option of the assessee.

3.2 How to find out the fair market value? The assessee can approach Government approved valuer for obtaining the fair market value of the property. The valuer will give a valuation certificate indicating the fair market value of the property as on 01.04.2001 and the same will be considered as the Cost of acquisition for calculating Capital Gain.

3.3 Indexed Cost of Acquisition The assessee is allowed to factor the impact of inflation on the cost by using the cost of the inflation index.

3.4 Formula to calculate Indexed Cost of Acquisition: Cost of acquisition * CII in the year of transfer of Asset / CII of the first year in which the assets held by the assesse

3.5 Cost Inflation Index (CII) is a means to measure inflation, which is used in the computation of long-term capital gains concerning the sale of assets. It is the indexed price of the asset purchased. The CII for a particular year is fixed by the government and released before the accounting year ends, for tax computation. The base year of CII is 2001. The base year is the first year of the cost inflation index and has an index value of 100.

Illustration 2 Ms.Neeta sold the residential flat owned by her in the year 2022-23 for Rs1, 51, 20,000. The said house was inherited from her father, who died on 17-2-2021. Her father had built the house long back, i.e., much earlier to 1-4-2001, and had bequeathed the same to his daughter. The original cost of acquisition by the father is not known to Mrs. Neeta. The fair market value (as certified by the Government approved valuer) as of 01.04.2001 was Rs 30, 80,000.

Capital Gain Tax on Sale of Inherited Property

4.1 Indexed Cost of Acquisition

(a)As of 01.04.2001 (The base year for CII)100
(b)In the year of sale of the property ( 2022-23)331
(c)Fair Market Value as on 01.04.200130,80,000
(d)Indexed cost of acquisition: c*b/a1,01,94,800

4.2 Computation of Capital Gain

aSale Consideration1,51,20,000
bExpenses on transfer @2%of (a)3,02,400
cNet Sale Consideration (a-b)1,48,17,600
dCost of Acquisition1,01,94,800
e.Long-Term Capital Gain (c-d)46,22,800

5. Cost of Improvement for computing capital gains is capital expenditure incurred by an assessee in making any additions/improvements to the capital asset. It also includes any expenditure incurred to protect or complete the title to the capital assets or to cure such title. The cost of improvement incurred or borne by the previous owner can be added to the cost of acquisition.

5.1 Renovation Cost Indexation benefit on the cost of renovation can also be taken for the purpose.

Home improvement/renovation can be added to the cost of acquisition for calculating capital gain. The expenses incurred should be of a capital nature.

The expenditure incurred on renovation or modifying the structure of the house to make it habitable can be added as the cost of acquisition. Adding a floor, or room or have changed the structure of the house can be claimed as home improvement expenses. But the regular painting of the house or other regular maintenance will not be considered as home improvement expenses.

5.2 Clearing of Mortgage by the inheritor In CIT v. Daksha Ramanlal (supra) the Gujarat High Court has rightly held that the payment made by a person to clear off the mortgage created by the previous owner is to be treated as the cost of acquisition of the interest of the mortgagee in the property and is deductible under S.48 of the Act.”

However, where the mortgage is created by the owner or heir himself after he acquires the property, the payment to redeem the mortgage will not be the cost of acquisition or improvement under section 48 of the Act.

6. Property is Inherited by more than one person. Capital gain on the sale of joint-owned inherited property will be taxed on all the owners in the proportion of the share in the property.

7. Sale of Inherited property by NRI: The tax provisions for the sale of inherited property are the same for NRI.

7.1 Illustration: Mr. Naresh is an NRI with an Indian passport. He wants to sell his ancestor’s property in India. The property was purchased in 1961. Now it is owned by him via legal heirship. He wants to sell the property now. Will there be any liability? Can he claim indexation?

Since the property was acquired in 1961, any profit made on the sale of it will be taxed as long-term capital gains. To compute capital gains, He will have to take the fair market value of the property as on 1st April 2001 as his cost. He needs to obtain a valuation report for the fair market value of the property as on 1st April 2001 from a registered valuer.

8. Exemption The long-term capital gain on the sale of the property is exempted if the proceeds are invested in the purchase or construction of a house. The purchase of a property can happen a year before the sale of the property in question or two years after its sale. Alternatively, one can invest in infrastructure bonds notified by the government.

Disclaimer: The information contained herein is generic and is meant for educational purposes only.

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