Any profits or gains arising from the transfer of a capital asset is taxable as ‘capital gains’ and is deemed to be the income of the tax payer in the financial year in which the transfer takes place. Similarly, income of every kind, which is not specifically taxed under any of the specified heads of income, like salary, house property, business income etc., and unless specifically exempt, is subject to tax under the head ‘income from other sources’.
Many a time, issues arise in respect of taxability of the property received as a gift or under a will/inheritance and its subsequent sale by the tax payer.
Not taxable as income :-As per the provisions of the Income Tax Act 1961, where an individual receives any immovable property (land or building or both), the value of which exceeds Rs 50,000 without adequate consideration, the same is taxable in the hands of the recipient. An exception, however, is made where an individual receives any gift of an immovable property under a will or by way of inheritance or in contemplation of death of the payer or donor. In such an event, it is not considered to be a taxable income for the recipient.
Not taxable as capital gains :-Any gain arising on transfer of a capital asset is subject to capital gains tax as per the provisions of the Act. An exception, however, has been made in respect of transfer of property under a gift or will and hence it is not subject to capital gains tax.
Subsequently, when such property received as gift or under will or inheritance is transferred/sold by the tax payer, then following points merit attention for computing the capital gains:
Computation of capital gains: Capital gains are computed as the difference between the sales consideration received/receivable on the transfer/sale of the property, as reduced by the cost of acquisition of such property and cost of any improvements thereto. Further, any expenditure incurred wholly and exclusively in connection with such transfer can also be reduced from the sales consideration.
Cost of acquisition: In the instant case, the cost of acquisition of such asset is deemed to be the cost at which property was acquired by the previous owner. Further, the cost of improvement of such property incurred by the previous owner or by the tax payer would also be included in the cost of such property for the purpose of computing the capital gains.
If the previous owner also received it as a gift or under a will: In case the previous owner of the property had also received such property by way of gift, will or inheritance then cost of such property shall be taken to be the cost at which the last previous owner had acquired such property otherwise than as gift or will or inheritance.
Period of holding: For the purpose of computing period of holding of capital asset, the period for which such property was held by the previous owner from whom the property has been received as gift or inheritance is also to be included. This is particularly relevant in case of long-term capital gains as these are taxable at lower rate. In case of property long-term capital gain arises in case such property is held for three years or more before the date of its transfer/sale.
To sum-up :-Adequate documentation should be maintained in respect of the property received under gift or will or inheritance, as the same may be required at a later date in case of any query/dispute with the tax authorities. Further, it is important to pay adequate attention to the date of acquisition of property, its transfer by way of gift or will or inheritance and its subsequent sale to ensure optimum tax benefits are availed of by the tax payer.