Inherited Property Held For 36 Months Is A Long-Term Asset – Livemint – 18-Dec-2014

December 26, 2014 - Uncategorized

I am staying in an old house which my father had bought in 1974 in my mother’s name. My father passed away in 1983, and my mother in 2001, without a Will. My sister has filed a suit in court for partition of the house. I want to sell the property and share the proceeds. From my share, I will buy a house. Will I have to pay tax on capital gains? —Ravi G. In the absence of a Will, we have assumed that you and your sister will mutually agree for equal share in the residential house. In case of inheritance, the period of holding of house shall be reckoned from the acquisition date of the house by the owner who has actually acquired it other than by inheritance, gift and so on. As the house had been held for more than 36 months from acquisition date, it shall be termed as a long-term capital asset. If the net sale proceeds exceed the cost of acquisition, then resulting gains shall be taxable as long-term capital gains (LTCG) in your and your sister’s hands in the respective proportion of your share. The cost of acquisition shall be the cost for which the previous owner, who has actually acquired the house other than by inheritance, gift and so on. Further, since your father acquired the house prior to 1 April 1981, you both have the option to take the actual cost of acquisition or fair market value (FMV) of the property as on 1 April 1981. Accordingly, while calculating LTCG, the cost of acquisition shall be the price at which your father had acquired the house or FMV as on 1 April 1981 as per your choice. The cost of acquisition and cost of improvement, if any, will have to be indexed by multiplying the original cost of acquisition or FMV/cost of improvement, if any, by the notified Cost inflation index (CII) for the year of sale and dividing by the CII of the year of purchase of the house, i.e., 1974 or during the financial year (FY) 1981-82 if FMV has been considered and of the year in which the cost of improvement has been incurred. With respect to the portion of LTCG taxable in your hands, an exemption from LTCG tax can be claimed by reinvesting the gain in one residential house located in India as per section 54, subject to conditions. This investment must be made within specified time frames (within one year prior to sale date or two years from sale date or within three years for an under-construction property). Accordingly, where the cost of a new house exceeds the LTCG (to the extent of your taxable share), the entire LTCG should be exempt from tax. But where the cost of new house is lower, the difference between the LTCG and cost of acquisition of new house shall be taxable in your hands. If you are unable to reinvest the proceeds into a new house before filing your tax return for the FY of sale of house, then the unutilized balance sale proceeds should be deposited into the Capital Gains Account Scheme (CGAS) before the due date of filing the personal tax return. The amount deposited into the CGAS should be utilized towards purchase of a new house within two years or in case of under–construction property, within three years of the sale of old plot. If you are unable to utilize the amount deposited into CGAS for construction of new house within the aforesaid time frame, then the unutilized amounts shall be taxable as LTCG in the FY in which three years from sale of old house has ended. The balance LTCG shall be taxed at 20.60% (inclusive of education cess). Additionally, if total taxable income during FY exceeds Rs.1 crore, surcharge at 10% on basic rate (i.e. 20%) should be applied. If your total income for the FY minus the said LTCG is below the basic income exemption threshold for the said FY, then such LTCG shall be reduced by the amount by which the total income so reduced falls short of the basic income exemption limit. The balance LTCG shall be taxed at flat rate of 20.6%. Please note that the investment in new house has a lock-in period of three years. Accordingly, if the new house is sold within a period of three years, the exemption claimed from LTCG in respect of old house shall be revoked.


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