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Inherited Property Sale: Worried About Capital Gains Tax?

Vipul

Vipul Bhavsar  |97 Answers  |Ask -

Tax Expert - Answered on Feb 14, 2025

Vipul Bhavsar is a chartered accountant from The Institute of Chartered Accountants of India. He has over 16 years of experience in corporate advisory, taxation and financial reporting.
His interest areas are consulting, income tax, GST and due diligence.
He founded his CA firm, V J Bhavsar and Associates, in 2010 through which he offers services like virtual CFO, trademark registrations, company /LLP formation, MIS reporting, audit, tax and TDS compliances, accounts receivable/payable management and payroll processing.... more
Asked by Anonymous - Feb 11, 2025Hindi
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Hello Sir, I recently sold a property that I inherited, and now I’m worried about the capital gains tax. It's a 30 year old property. Are there any exemptions or strategies I can use to minimise the tax on this sale? I’m considering reinvesting in another property—would that help? I'm 45, from Delhi.

Ans: Sir, following are the assumption that I have made before answering your questions since the data is incomplete.
1. The property is inherited before 2 years from date of sale
2. Apart from the property is sold, you own only one house
3. The inherited property that is sold is a residential house/plot
4. New property being bought is residential house property

You can invest the Long term capital gain and claim exemption under section 54 and 54F subject to the new property is not sold before 3 yrs from the date of acquisition
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  |9758 Answers  |Ask -

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

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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

..Read more

Ramalingam

Ramalingam Kalirajan  |9758 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Aug 28, 2024

Money
Hi, I have recently in August 24 sold ancestral property purchased by my grandfather in 1950. It was passed on from grandfather to my father then to me. I wish to reinvest the capital gains in buying new property to avoid capital gain tax. My queries are: 1. How the capital gain tax will be computed? 2. Is it mandatory to get FMV as on 1.4.2001 from Govt registered valuer? 3. How to claim 1% TDS deducted on sale value? 4. Can I choose old capital gain tax rule only if my capital gain tax is more in new one OR Do I have the option of choosing between old and new capital gain tax rule at my will? Thanks
Ans: When you sell an ancestral property, you need to calculate the capital gains to determine your tax liability. Since your property was acquired in 1950, the cost of acquisition will be indexed for inflation, and you'll calculate the capital gains based on the fair market value (FMV) as of 1st April 2001.

1. How the Capital Gain Tax Will Be Computed?
Steps to Compute Capital Gains:

Fair Market Value (FMV) as of 1st April 2001: Since the property was purchased in 1950, you can choose the FMV as of 1st April 2001 as your cost of acquisition. This is crucial for calculating the capital gains accurately.

Indexed Cost of Acquisition: The FMV as of 1st April 2001 is adjusted for inflation using the Cost Inflation Index (CII) to arrive at the indexed cost of acquisition. The formula is:

Indexed Cost of Acquisition = (FMV as of 1st April 2001) x (CII of Year of Sale / CII of 2001-02)

Calculation of Capital Gains: The capital gains are calculated as:

Capital Gains = Sale Value - Indexed Cost of Acquisition - Any Expenses on Transfer

Tax Rate: Since the sale occurred in August 2024, the new capital gain tax rule applies at 12.5%. You cannot choose the old capital gain tax rule as it is not applicable to sales made after 1st April 2024.

Example:

Let's assume the FMV as of 1st April 2001 is Rs. 10 lakh, and the property was sold for Rs. 1 crore in August 2024. The CII for 2001-02 is 100, and the CII for 2024-25 is 348 (hypothetical for illustration).

Indexed Cost of Acquisition = Rs. 10 lakh x (348/100) = Rs. 34.8 lakh

Capital Gains = Rs. 1 crore - Rs. 34.8 lakh = Rs. 65.2 lakh

Capital Gains Tax = 12.5% of Rs. 65.2 lakh = Rs. 8.15 lakh approximately

2. Is It Mandatory to Get FMV as on 1.4.2001 from Govt Registered Valuer?
Importance of FMV from Registered Valuer:

Accuracy and Compliance: It is highly recommended to get the FMV as of 1st April 2001 from a government-registered valuer. This ensures that the FMV used in your capital gains calculation is accurate and in compliance with the Income Tax Department's guidelines.

Documentary Evidence: In case of any scrutiny by the Income Tax Department, a valuation report from a registered valuer will serve as strong documentary evidence, safeguarding you against any disputes regarding the FMV.

Mandatory?

Yes, for Precaution: While it may not be legally mandatory to get the FMV from a registered valuer, it is strongly advised to do so to avoid potential issues with tax authorities. Without it, the Income Tax Department may question the FMV you have used, leading to complications.
3. How to Claim 1% TDS Deducted on Sale Value?
Understanding TDS Deduction:

Section 194-IA: When a property is sold, the buyer is required to deduct 1% TDS on the sale value if the sale consideration exceeds Rs. 50 lakh. This TDS is deducted at the time of sale and deposited with the government.
Claiming TDS Credit:

Form 26AS: Ensure that the TDS deducted is reflected in your Form 26AS, which is a consolidated tax statement issued by the Income Tax Department. This form shows all TDS credited to your PAN.

Filing Income Tax Return (ITR): While filing your ITR, you can claim the TDS deducted against your total tax liability. The 1% TDS will be adjusted against your total tax liability, and if your total tax liability is less than the TDS, you can claim a refund.

TDS Certificate: The buyer should provide you with a TDS certificate (Form 16B) as proof of the TDS deducted. Ensure you have this certificate when claiming the TDS credit.

4. Can I Choose Between Old and New Capital Gain Tax Rule?
Applicability of Tax Rule:

New Capital Gain Tax Rule: Since your property was sold in August 2024, the new capital gain tax rule is applicable. The new rule imposes a flat rate of 12.5% on long-term capital gains for property sales made after 1st April 2024.

No Option to Choose: You do not have the option to choose the old capital gain tax rule, as it is only applicable to property sales made before 1st April 2024. The government has mandated the new tax rule for all property sales post this date.

Reinvestment to Save on Capital Gains Tax
Section 54:

Reinvestment in New Property: To save on capital gains tax, you can reinvest the capital gains in purchasing a new residential property. Under Section 54 of the Income Tax Act, if you reinvest the capital gains within two years from the date of sale, you can claim an exemption from capital gains tax.

Capital Gains Account Scheme (CGAS): If you are unable to reinvest the capital gains before the filing of your ITR, you can deposit the capital gains in a Capital Gains Account Scheme (CGAS) with a bank. This allows you to claim the exemption while you decide on the reinvestment.

Time Limits: You must reinvest the capital gains within two years (for buying) or three years (for constructing) a new property to avail of the exemption under Section 54.

Final Insights
Selling ancestral property involves various tax implications. By understanding how capital gains are calculated, getting an FMV from a registered valuer, and claiming TDS, you can efficiently manage your tax liability. While the new capital gain tax rule at 12.5% applies to your sale, you can reinvest the gains in a new property to claim an exemption under Section 54. Always consider consulting with a Certified Financial Planner to ensure all aspects are covered and compliance is maintained.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

..Read more

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