Calculation of Capital Gains on property received by Gift or Will

Summary: Capital gains from property received by gift or will are calculated based on the cost of acquisition by the previous owner, as per Section 49(1) of the Income Tax Act. The holding period of the previous owner is also considered when determining whether the gain is short-term or long-term. According to Section 55(2), if the property was acquired before April 1, 2001, the assessee has the option to use the fair market value as of that date for capital gains calculation. The concept of indexed cost of acquisition can be used to account for inflation when determining the final taxable amount. In cases where a property is inherited, the Income Tax Department generally does not allow indexation for the period prior to inheritance, resulting in higher capital gains taxes. However, several High Court rulings, such as CIT Vs. Manjula J. Shah (Bombay High Court) and Arun Shungl00 Trust Vs. CIT (Delhi High Court), have sided with taxpayers, supporting the inclusion of indexation from the original purchase date. For example, in a case where a plot was inherited and sold in 2023, courts have allowed taxpayers to compute capital gains using the indexed cost of acquisition from 2001, significantly reducing tax liabilities.

The fourth head of Gross Total Income is “Capital Gains,” which refers to any profits or gains arising from the transfer of a capital asset during the previous year.

Section 49(1), provides that where the capital asset become the property of the assesse by any of the modes specified therein, the cost of acquisition of the asset shall be deemed to be the cost for which the ‘previous owner of the property’ acquired it, as increased by the cost of any improvement of the asset incurred or born by the ‘previous owner of the property’ or the assesse, as the case may be.

In the case of Gift or WILL or at the time of partition of Hindu Undivided Family, any property received by any person, when this property is sale, under this circumstances, while calculating capital gain cost of acquisition will be the cost of Previous Owner.

Over and above, time of period of holding of the property is also to be considered as of the previous owner.

Section 55(2) of the Act, explain about the “cost of acquisition” is different for different assets like, goodwill, shares or any other securities, share or shares allotted to a shareholder of a recognized stock exchange in India, being an equity share in a Company or a unit of an equity oriented fund or a unit of business trust. In relation to other capital asset,-

Where the capital asset became the property of the assesse, before the 1^st day of April, 2001, means the cost of acquisition of the asset to the assesse or the fair market value of the asset on 1st April, 2001, at the option of the assesse. Where the capital asset become the property of the assesse by any of the modes specified in section 49(1) of the Act.

Section 49 provide that for calculation of capital gain, transfer of any proprietary firm or partnership firm in to Company, Cost of Acquisition will be the cost of the propriety firm or partnership firm.

So far as cost of acquisition on the assets received by gift, will or hereditary and for period of holding there is difference of opinion, but so far as index cost of acquisition, view of Income Tax department if different. Department is of the view that the year in which the asset received the market value of that year is to be considered and so question of index cost does not arise.

While as per section 2(42A), the cost of the previous honor is to be considered and as per section 49(1), cost of the previous owner is to be considered. To understand it take an illustration.

Mr. Atulbhai has received a plot of land as per the will of his grandfather in the year 2022. Grandfather has purchased this plot in the year 1981 at the cost of Rs.10 lakhs. The market value of this plot on 1^st April, 2001 was Rs.40 lakhs.  In the year 2023, Atulbhai wish to sell this plot for Rs.1 crore. Advice Mr. Atulbhai.

So far department’s view, it will be considered as long term gain, because it was purchased in the year 1981 and wish to sell in the year 2023. The cost of plot purchased by grandfather of Atulbhai in the year 1981 was Rs.10 lakhs. Cost of the plot will be considered will be Rs.10 lakhs and wish to sell the plot in the same year, so benefit of index cost not available.

There are many High Court Judgments in favor of assesse.

Commissioner of Income Vs. Manjula J. Shah (Bombay High Court), Income Tax Appeal No. 3378 of 2010, Dated: 11/10/2010 in favor of Assessee

Arun Shungl00 Trust Vs. CIT (Delhi High Court), ITA No. 116/2011 Dated 13/02/2012

Smt. Meena Devgan Vs. ITO 117 TTJ 121 (Cal)