Tax on Capital gain arising on the sale of gifted or inherited properties and Indexation of the same under Income Tax Act, 1961.

A capital asset being shares and securities (listed), unit of UTI (listed/unlisted), unit of equity oriented mutual fund (listed/unlisted), zero coupon bonds (listed/unlisted) is considered as long term capital asset if it is retained for more than 12 months and 24 months in case of unlisted shares and securities and land or building or both and 36 months in case of other assets . Any gain, arising from its sales is considered as long term capital gain. In case of long term capital gains the capital gains is calculated according to indexed cost of acquisition and improvement. Cost inflation index of the year of acquisition and improvement is considered for the purpose of capital gain calculation.

Where the capital asset is acquired by a person as a result of gift or inheritance, the question arises in mind which year’s cost inflation index should be considered for calculating indexed cost of acquisition.

For example if A purchases a property in the year 1985-86 and he dies in 2006-07 whereby the said property gets inherited by his only son B in the year 2006-07. B sells the same property in year 2017-18.

Now in the above case revenue would want to allow the indexation from year 2006-07 considering that B became owner of the property in year 2006-07, however B would like to get the indexation from year 1985-86 ie the year in which the property was first acquired by his father A.

Explanation 1(b) to section 2(42A) of Income Tax Act, 1961 provides answer to the above situation. It says that in the case of a capital asset which becomes the property of the assessee in the circumstances mentioned in sub-section (1)]of section 49[ie in case of gift or inheritance or liquidation of a company or under irrevocable trust], there shall be included the period for which the asset was held by the previous owner referred to in the said section.

That means where an asset is acquired by gift or inheritance, the period of long term capital asset shall be reckoned from the date when the previous owner acquired such asset and the indexation shall be allowed accordingly from the year of acquisition by the previous owner.

Further section 49(1) also provides that in such cases 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 assets incurred or borne by the previous owner or the assessee, as the case may be.

Thus the cost of acquisition as well as the cost of improvement by the  previous owner of a capital asset shall be the cost of acquisition of such asset to the person selling the such capital asset acquired under gift or inheritance and the indexation shall be allowed from the year of acquisition or improvement by the previous owner.

Mumbai ITAT has also held in (2009) 318 ITR (AT)417 that the indexation in case of gifted or inherited property will be available from the year of acquisition of such property by previous owner, similar view also find support in (2012) 50 SOT 629, (2004) 89 TTJ Chd. Tribunal, 117 TTJ 121  Kolkata Tribunal, (2008) 19 SOT 251 Delhi Tribunal, (2010) 4 ITR 44 Chennai Tribunal.

Also Read:

TAX Implications of Investing in Property

 Taxation of Gift- Under Income Tax

Read Other Articles from Advocate Amit Bajaj

(Author – Amit Bajaj Advocate, Bajaj & Bajaj Advocates, 128, Sangam complex, Milap chowk, Jalandhar City (Punjab), Email: amit@amitbajajadvocate.com, M +919815243335)

(Republished With Amendments)

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18 Comments

  1. Kamal verma says:

    Can an assesses liable to pay tax on property being guaranteed to a pvt ltd company to a bank loan in which assess is a director, later on bank auctioned the property and no money is received by an assessee.

  2. BALCHANDRA RAO says:

    I HAD PURCHASED A UNDER CONSTRUCTION FLAT IN 2014 AND REGISTERED THE FLAT IN APRIL 2017 BY PAYING STAMP DUTY AND REGISTRATION CHARGES. I HAVE NOT MADE THE PAYMENT OF SERVICE TAX. SINCE GST WAS IMPLEMENTED IN JULY 2017 I WOULD LIKE TO KNOW WHETHER GST HAS TO BE PAID FOR REAL ESTATE. I AM CONFUSED. PLEASE REPLY.

  3. Harleen says:

    I also differ from the author, as when asset is acquired in any mode referred in sec 49(1), for indexation CII of the year in which the asset is first held by the assesse needs to be taken. This is as per Income Tax Act. But same view is not taken in High courts.

  4. akash pravin singh says:

    I have received plot from my father which was purchased from there own income. they have gifted same equally between myself, mother & brother.
    we have sold this plot in same year. kindly let me know i have to pay capital gain on above transaction ??

  5. K Bhattacharya says:

    Hello Sir,
    My father would be receiving a cheque of INR 16 lacs as part of share received among his brothers and sisters from the sell of ancestral property.
    My father is a senior citizen
    My question is: can my father transfer a portion of this INR 18 lacs to me … say 8 lacs.

    Also , what all tax need to be paid by my father and me.

    Thanks in advance.

  6. Devesh Kumar says:

    my grandpa is transfer me a land by way his weil and i sale out the property on aug 2015 is their is arising any capital gain tax . pls guide me

  7. KUSHAL KAD says:

    MY MOTHER IN LAW IS ALIVE. SHE PURCHASED A RESIDENTIAL FLAT IN 1996 AND LATER ON IN 2009 SHE GIFTED TO HIS SON AND ME. IN 2013 SON (MY HUSBAND ) DIED. MOTHER IN LAW AND MY SON RELINQUISHED THEIR SHARE IN MY FAVOR IN 2014. NOW I AM SELLING IN 2016. WILL I COME UNDER CAPITAL GAIN TAX OR MY MOTHER IN LAW WHO IS ALIVE AS ON DATE. WHO WILL MAKE THE AGREEMENT TO SELL AND RECEIVE THE CONSIDERATION. SALE WILL BE APPX 65 LACKS AND SO THE BUYER WILL DEDUCT THE TDS AS PER LAW. PL. REPLY.

  8. sumedha says:

    Dear sir,

    I need your help on following matter please.
    If spouse gift its inherited land through Will to her Husband and husband sales the land then whether clubbing provisions are applicable in this case like how it is applicable in case Rental income . Also who needs to Invest in new property if this capital gain is to be exempted from tax . Please Response ASAP, it is very Urgent

  9. G.Nalangilli says:

    My father acquired property by inheritance from his father 60 years ago which was purchased by him for a very meagre amount. My father in the year 2000 made a will on me for a piece of plot which now I intend to sell which
    costs around Rs.20 lakhs. What will be the tax implications on this?

  10. S.Ramprasad says:

    Dear Sir,

    My father purchased a plot (40′ x 30′)in Laggere, Bangalore, for Rs.2000/- on 15-08-1980.
    My father passed away in Nov. 2001. The said plot is now disposed off on 28-08-2012 for Rs. 12.0 L.
    Besides me, I have 5 brothers and 2 sisters who equally shared the amount received on disposal and each one of us has got Rs. 1.50 L.

    Kindly let me know the Capital Gain Tax burden on me.

    Thanks,
    S.Ramprasad.

  11. vinod says:

    sir, what will the treatment in the case, if a property purchased by mr. A in year 1985-86 for 2 lakh and he make improvement in year 1986-87 rs. 1 lakh. he gift the property to his son B in 1986-87. B made improvement in said property rs. 1 lakh in year 2005-06 and he gift the property to his son in 2011-12 and Mr. C sold property in year 2011-12. what will be the capital gain?
    sir please mention period of holding, type of capital gain arise, improvement cost allowed,….

  12. Naresh Dharia says:

    I differ with the analysis as given by the author….

    I think the cost of the asset would be reckoned from the day the previous owner acquires but the holding period would becalculated from the period the assessee has inherited. Although there are judgements as such

  13. V.K. Verma says:

    Dear Pratik
    The assessee needs to justify his claim by offering evidence that the property was actually inherited by all the brothers in equal proportions and all the brothers have paid their respective share of capital gain tax.

  14. Pratik Sharma says:

    Hello sir,
    One of my client has got the inherited property and has sold the same in year 11-12. He is not the only son and has three brothers. He has sold the property in his name as legal heir and distributed the gain among four brothers.. In the eyes of law whole capital gain will arise in hands of client but actually he got only his one-fourth share… In such case how we can save capital gain????

    Do reply its very urgent…..

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