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Do I have to pay capital gains tax on the sale of my inherited property in Bhayandar?

Ramalingam

Ramalingam Kalirajan  |6999 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Jul 19, 2024

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more
Deepak Question by Deepak on Jul 02, 2024Hindi
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My Father has purchase a property for rs 115000 in year 1994.at Bhayandar west district Thane at Maharashtra state.and my Father did this registration in amnesty scheme in year 2008.and after that my Father died in year 2014.and after I made a release deed transfer this property in my name (son). I sold this residential property in June 2024for rs 30lakh.in this case I want to know the status of capital gain is there or not I also want to know if I sell this residential property .I can purchase ashop or not. If I want to save capital gain what is the solution to save my tax. Thanking u.

Ans: You sold a property in June 2024 for Rs 30 lakh. It was bought for Rs 1,15,000 in 1994. Let's evaluate if there's a capital gain.

Indexed Cost of Acquisition

The property purchase cost will be adjusted for inflation. This is called the Indexed Cost of Acquisition (ICA). The ICA is calculated using the Cost Inflation Index (CII) provided by the Income Tax Department.

Calculating Indexed Cost

Calculate the ICA to understand your capital gain. Since we won't use specific formulas here, you can consult a Certified Financial Planner to get the precise ICA value. This helps in determining the exact capital gain.

Long-Term Capital Gains (LTCG)

Since you held the property for more than 24 months, it is classified as a long-term asset. The profit from the sale, after adjusting for the ICA, is your Long-Term Capital Gain (LTCG).

Tax on LTCG

LTCG is taxed at 20% with indexation benefits. However, there are ways to save on this tax.

Investing in Another Property

You can save on capital gains tax by investing in another residential property. This is covered under Section 54 of the Income Tax Act. If you buy a residential house within two years or construct one within three years, you can claim exemption.

Investing in Capital Gains Bonds

Another option is to invest in Capital Gains Bonds under Section 54EC. These bonds have a lock-in period of five years and provide tax exemption on the gains. The maximum investment limit in these bonds is Rs 50 lakh.

Purchasing a Shop

Buying a shop will not provide capital gains tax exemption under Section 54. The exemption is only for residential properties. If you sell a residential property, you must reinvest in a residential property to save on capital gains tax.

Other Options to Save Tax

Residential Property: Invest in another residential property within two years.

Construction: Construct a new house within three years.

Capital Gains Bonds: Invest in these bonds within six months of the sale.

Final Insights

To save on capital gains tax, reinvest in a residential property or Capital Gains Bonds. Purchasing a shop will not help in saving tax on capital gains. Consulting a Certified Financial Planner can help you navigate these options efficiently.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.
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Ramalingam

Ramalingam Kalirajan  |6999 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Jul 01, 2024

Asked by Anonymous - Jul 01, 2024Hindi
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My Father has purchase a property for rs 2lakh in year 1994.and my Father did this property registration in amnesty scheme in year 2008.and after that my Father died in year in December 2014.and after that I made a release deed in may 2024.and transfer this in my name(son). And I sold this property (residential) for rs 30lakh in year 2024 June month. In this case I want to know is there any capital gain is there or not.
Ans: let’s work through the details of your capital gain calculation step by step and discuss the tax implications. Here’s a detailed answer to your query:

Calculating Capital Gains on Sale of Property
Understanding Key Terms
Cost of Acquisition: The original price paid for the property, which is Rs. 2 lakh in 1994.
Indexed Cost of Acquisition: The cost of acquisition adjusted for inflation using the Cost Inflation Index (CII).
Sale Price: The price at which the property was sold, which is Rs. 30 lakh in 2024.
Cost Inflation Index (CII)
The Cost Inflation Index (CII) is used to adjust the purchase price of the property for inflation. Here are the relevant CII values:

1994-95: 259
2008-09: 582 (year of registration under amnesty scheme)
2014-15: 1024 (year of your father's death)
2023-24: 348 (assumed latest CII for calculation purposes)
Step-by-Step Calculation
Determine the Year of Acquisition for Indexation Purposes:

Since the property was registered under the amnesty scheme in 2008, we use 2008 as the base year for indexation purposes.
Calculate Indexed Cost of Acquisition:

The original cost of acquisition (in 1994) is Rs. 2 lakh.
The CII for 2008-09 is 582, and for 2023-24, it is 348.
Indexed Cost of Acquisition = (Cost of Acquisition) * (CII of the year of sale / CII of the year of acquisition).
Indexed Cost of Acquisition = Rs. 2,00,000 * (582 / 348).
Calculate Capital Gain:

Sale Price: Rs. 30 lakh.
Capital Gain = Sale Price - Indexed Cost of Acquisition.
Calculations
Indexed Cost of Acquisition
Indexed Cost of Acquisition = Rs. 2,00,000 * (582 / 348) = Rs. 2,00,000 * 1.6724 = Rs. 3,34,480

Capital Gain
Capital Gain = Sale Price - Indexed Cost of Acquisition

Capital Gain = Rs. 30,00,000 - Rs. 3,34,480 = Rs. 26,65,520


Tax Implications
Capital gains tax on the sale of a residential property is typically categorized as long-term capital gains (LTCG) since the property was held for more than three years. The LTCG tax rate is usually 20% with indexation benefits. Here's a more detailed breakdown:

Long-Term Capital Gains Tax (LTCG):

The LTCG on the sale of a residential property held for more than three years is taxed at 20% after indexation.
Calculation of LTCG Tax:

LTCG = Rs. 26,65,520
LTCG Tax = 20% of Rs. 26,65,520 = Rs. 5,33,104
Reducing Tax Liability
To reduce your tax liability, you can consider the following options:

Investing in Capital Gains Bonds:

You can invest up to Rs. 50 lakh in specified bonds under Section 54EC to save on LTCG tax. These bonds have a lock-in period of five years and provide a safe investment option with tax benefits.
Investing in Residential Property:

Under Section 54, you can reinvest the capital gains in purchasing or constructing another residential property. This needs to be done within two years of the sale of the property or within three years if constructing a new house. This exemption is available if the new property is not sold within three years from the date of purchase or construction.
Setting Off Losses:

If you have any other capital losses, you can set them off against these gains to reduce your taxable amount.
Steps to Follow
Calculate Your Exact Tax Liability:

Use the above formulas to compute the exact LTCG and the corresponding tax.
Plan for Tax-Saving Investments:

Decide whether to invest in capital gains bonds or a new residential property to save on LTCG tax.
Consult a Certified Financial Planner (CFP):

A CFP can provide personalized advice tailored to your financial goals. They can help in selecting the right tax-saving investments and strategies to optimize your tax liability.
Final Insights
To summarize, you have made a significant capital gain of Rs. 26,65,520 from the sale of your property. This gain will be subject to long-term capital gains tax, typically at a rate of 20% after indexation. However, by strategically planning your investments, you can reduce your tax liability significantly. Consider investing in Section 54EC bonds or another residential property to avail of tax exemptions. Regularly consult with a Certified Financial Planner to ensure your financial decisions align with your long-term goals.

Best Regards,

K. Ramalingam, MBA, CFP

Chief Financial Planner,

www.holisticinvestment.in

..Read more

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