My father gifted a villa for me which he built 43 years back with his own money, the gift deed was done in 2022. Now I am planning to sell the same as I'm not staying in that city... 1) What will be tax implications 2) I am planning to buy another property for the sale proceeds received 3) What are tax implications and if any funds left I'm planning to invest in government bonds... Any other implications please guide

Ans: You’ve been given a valuable asset by your father, and now you’re planning wisely. Let’s break down the tax implications and options in a simple, 360-degree way for your situation.

? Gift from father and its tax effect

– Gifts from a parent are fully tax-exempt.
– The villa received from your father in 2022 is not taxable for you.
– No gift tax applies if the giver is a relative under income tax rules.
– But tax comes into play when you sell the gifted property.

? Cost of acquisition and long-term capital gain

– For capital gains, the cost of the villa is what your father paid.
– Since he built it 43 years ago, we use the fair market value (FMV) as of April 1, 2001.
– This FMV becomes your cost of acquisition.
– You can get a valuation certificate from a registered valuer.
– Also, indexation benefit applies since it's a long-term asset.
– Indexed cost reduces the tax burden significantly.
– The sale proceeds minus this indexed cost is your long-term capital gain (LTCG).

? Tax rate on the long-term capital gain

– LTCG on property is taxed at 20% with indexation.
– Additionally, surcharge and cess apply based on the total income slab.
– The new budget has not changed this rule.

? How to save capital gains tax

– You can claim exemption under Section 54 of Income Tax Act.
– Buy or construct another residential house in India.
– The new house must be bought within 2 years after or 1 year before the sale.
– If you are constructing, you must finish it within 3 years.
– Use only capital gains (not full sale amount) to claim exemption.
– This helps you legally avoid capital gains tax.

? If you cannot buy a house before filing returns

– Use Capital Gains Account Scheme (CGAS).
– Deposit the capital gain amount in this account before the ITR filing due date.
– This keeps your exemption valid till you invest in a property.
– If unused after 3 years, the amount becomes taxable.

? What if you want to invest in bonds

– You can also claim exemption under Section 54EC.
– Invest the capital gain in government-specified bonds.
– These bonds are from REC, NHAI, etc.
– Investment limit is Rs. 50 lakhs per financial year.
– You must invest within 6 months from sale date.
– Lock-in is 5 years. Interest earned is taxable.

? Can you combine both options?

– No, you cannot claim both Section 54 and 54EC for the same capital gain.
– You must choose one.
– If part of the capital gain is used for property and the rest in bonds, that is allowed.
– Each part must be invested as per rules to claim respective benefits.

? Other points to note

– Get sale deed and gift deed copies properly filed.
– Ensure the buyer deducts TDS (if sale exceeds Rs. 50 lakhs).
– TDS of 1% applies under section 194-IA.
– Buyer needs to file TDS Form 26QB and provide TDS certificate.
– Mention this transaction in your Income Tax Return (ITR).
– Use ITR-2 or ITR-3 as applicable.
– Declare exempt income also properly to avoid notices.

? If any money is left after reinvestment

– You can consider investing in actively managed mutual funds.
– These have potential to give better returns than fixed deposits.
– Regular funds via a Certified Financial Planner ensure proper goal alignment.
– Avoid direct funds to reduce mistakes in asset allocation.
– Stay invested based on your time horizon and risk comfort.

? Avoid index funds

– Index funds only copy stock indices.
– They don’t adjust during market fall.
– Actively managed funds have professionals who aim to beat the market.
– They manage risk better, especially for non-expert investors.

? Why not annuities?

– Annuities give low returns.
– The money gets locked.
– Tax on annuity income is as per your slab.
– Not suitable for long-term wealth growth.

? What documents you must keep

– Gift deed copy
– Fair Market Valuation Report (for 2001 value)
– Capital Gains calculation worksheet
– Proof of reinvestment (new house or 54EC bond receipts)
– CGAS account proof if applicable
– Sale deed and buyer’s TDS certificate

? Finally

– Your gift is tax-free.
– Selling the villa triggers long-term capital gain.
– Use Section 54 or 54EC to save tax.
– Property reinvestment or bonds — both help.
– Capital Gain Account Scheme helps if there's time lag.
– Invest any leftover wisely through guided regular mutual funds.
– Keep records clean and file ITR with full disclosures.
– This keeps your wealth protected and tax-compliant.

Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment