Capital Gain Tax Exemption – Part 2

Sale Of Inherited Property

1  Part 1 of the series Capital Gain Tax Exemption covered the tax provisions and legal judgments related to the date of purchase or construction of new property for availing tax exemption under section 54/54F of the Act.

1.1 Part 2 of the series will cover the topic – Capital Gain Exemption on the sale of inherited property. Refer to the article Capital Gain Tax on Sale of Inherited Property for a better understanding of the basic provisions.

1.2 In this article, let us focus on specific issues involved in Capital Gain tax exemption on the sale of inherited property. An attempt has been made to simplify the relevant provisions & legal decisions with the help of Illustrations.

2. ILLUSTRATION 1: Mr. Naresh sold a residential property in Nov 2022 for a consideration of Rs 1.20 crores. The said property was originally acquired by his father by Partition Deed dated 21-6-1987. He got 1/4th right over the property after the demise of his father on 24-4-1993. The ¾ right vested with the other legal heirs i.e., three sisters of Mr. Naresh.

The sisters released their ¾ rights by executing release deed in favour of him for a consideration of Rs. 3 lakhs on 16-2-1996. Mr. Naresh transferred (sold) the property on 13.11.2022.

3. Query 1: Whether Mr. Naresh can claim the amount of Rs 3 Lakhs paid to her sisters as expenditure incurred in connection with the transfer of property and reduced it while working out capital gains?

3.1 Reply to Query 1:   Yes, Mr. Naresh can claim such an amount under section 48 and reduce it while working out capital gains. The sisters had a title to property and without extinguishing it or without providing for its adjustment, the assessee could not have sold property. Held by Hon’ble HIGH COURT OF BOMBAY in case of Assistant Commissioner of Income-tax, Circle-3, Nagpur v. Kamlakar Moghe.

4. Query 2: Whether Mr. Naresh  can claim the benefit of indexation from 01.04.2001 in respect of the whole property including 3/4th share of property from the other three legal heirs

Capital Gain Tax Exemption

4.1  Reply to Query 2: No. Mr. Naresh acquired his 1/4th share of the property by inheritance, but the remaining 3/4th share of the property has been acquired from other legal heirs by way of a release deed on payment of consideration. Therefore, the benefit of indexation in respect of 1/4th share only can be claimed from the date the previous owner held the asset. For balance 3/4th share, the indexation benefit will be from the date of release deed executed by other legal heirs of the property. – held by ITAT CHENNAI BENCH ‘A in the case of R. Mohan v. Income-tax Officer

4.2 Assuming that Fair Market Value as on 01.04.2001 was Rs 20 Lakhs, the calculation of the indexed cost of acquisition will be as follows:


Description Calculation of indexed cost Indexed Cost Amount (Rs.)
(a) Cost of Acquisition in respect of 1/4th share of property received by Mr. Naresh by inheritance 5,00,000*331/100 16,50,000
(b) Cost of Acquisition in respect of 3/4th share of property received by way of Release Deed dated 16-2-2016. 15,00,000*331/254 19,54,725

5. ILLUSTRATION 2: Ms. Neeta sold the residential property for a total consideration of Rs. 1.10 crores on 30.06.2022 and offered the long-term capital gains to tax. The said flat was originally purchased by her son, Mr. Ansh on 29/1/2002 at a cost of Rs. 10 Lakhs.  Mr. Ansh gifted the property to Ms. Neeta with a gift deed dated 1/2/2012.

5.1 Query 3:  Whether the indexed cost of acquisition has to be determined with reference to the cost inflation index for the year 2001-02 (in which the cost of acquisition was incurred) or the year 2011-12 (Ms. Neeta  became the owner of the asset).

5.2 Reply to Query 3: The indexed cost of acquisition has to be computed with reference to the year in which the previous owner first held the asset and not the year in which the assessee became the owner of the asset. Held by Hon’ble Bombay High Court in the case of Commissioner of Income-tax-12 v. Manjula J. Shah

5.3  The Capital Gain in the hand of Ms. Neeta will be calculated as follows:-

Sale Consideration: Rs 1,10,00,000
Indexed Cost of acquisition: 10, 00,000*331/100 Rs. 33,10,000
Capital Gain Rs. 76,90,000

6. ILLUSTRATION 3: Ms. Pooja inherited a piece of land from her mother which was subject to a mortgage. She paid Rs. 25000/- for the release of the property from the mortgagee. Later on, Ms. Pooja sold the said land to Mr. Prakash. While disclosing capital gain in her return, she claimed, inter alia, a deduction of Rs. 25,000 paid by her to the mortgagee.

6.1 Query No. 4:   Whether aforesaid payment of Rs 25000/- could be regarded as a cost of acquisition and, therefore, formed part of the total cost of acquisition of property sold by Ms. Pooja.

6.2 Reply to Query 4:  Ms. Pooja is entitled to claim a deduction of Rs. 25,000 paid by her for the redemption of the mortgage to compute the capital gains.

6.3 Legal decision: It was held by the Hon’ble HIGH COURT OF GUJARAT in the case of Commissioner of Income-tax v. Daksha Ramanlal that the assessee had sold something more than the capital asset that she had received by way of inheritance, viz., the interest which the owner had transferred to the mortgagee. As she had redeemed the mortgage after paying the sum of Rs. 25,000 to the mortgagee, the said amount was also required to be taken into account as the cost of acquisition while computing the capital gain.

7. ILLUSTRATION 4: Mr. Sanjeev acquired the property by way of will from his mother. The mother acquired the property by way of will from his father and the father acquired the property from his grandfather by inheritance.

7.1 Query No. 5:   Mr. Sanjeev decides to sell the property. The query is who will be considered as the previous owner, the mother or the grandfather?

7.2 Reply to Query 5: The previous owner means the last previous owner of the capital Asset, who actually paid for the assets. The cost of acquisition shall be taken as the cost to the grandfather who will be treated as the previous owner and not to the father or mother.

7.3 It was held in the case of CIT v Janhari v Desai (2012) that the period of holding shall also be taken from the date the grandfather acquired the property. He purchased the property before 01.04.2001, hence the cost of acquisition shall be taken as fair market value on 01.04.2001.

8. Other Relevant Points:

8.1 The amount of tax dues of the deceased paid by the assessee who has inherited property from the deceased cannot be treated as the cost of acquisition of such property so inherited. – K Saraladevi v CIT (1996)

8.2 The expenditure incurred by the assesse or the previous owner before 01.04.2001 is to be completely ignored, whether the assesse opts for the market value as of 01.04.2001 or not.

8.3 Fair market value”, is the price that the capital asset would ordinarily fetch on sale in the open market on the relevant date. Where fair market value is not ascertainable, such price may be determined in accordance with the rules made under the Income Tax Act.

Disclaimer: The article is for educational purposes only.

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  1. harsh says:

    Two properties are sold in consecutive FYs (First in Mar 23 & Second in Jun 23) and proceeds from both the sales are used for buying a single property in Jul 23. Should the ITR 2 be filed for AY 23-24 as well as AY 24-25 to include income from both sales separately, however, the property bought details remain the same. Request Clarify. Regards

    1. ANITA BHADRA says:

      In my view, yes.
      Report the sale consideration received for respective property & amount invested for purchase in the relevant FY

  2. Prabhakar Srivastava says:

    Good Day!
    Need to answer for a transaction for Piece of agriculture land ( 5 K.M from municipality) sold in June,23 for Rs.40 lakhs. This land was taken by my grandfather before 1990.
    Actually land sold by my mother after demise of my father and out of consideration 10 lakhs received in my bank account.
    Query : Taxability of Capital Gain in my Mother Account and me. How i save this CG.

  3. Sridhar says:

    very useful information n good guide to understand various aspects n situations fir computing Capital gains
    Sridhar Retd ITO

  4. Sudhir Sharms says:

    Very important points which are commonly faced have been explained well supported with relevant judgements.
    Best wishes !

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October 2023