The primary purpose of any investment or asset acquisition is to earn money above the capital. Interest on a fixed deposit, mutual fund returns, dividends, profit from asset transfers – they all are capital gains. In short, capital gains serve as an incentive to investors.
What if you end up selling a piece of land you have inherited or received as a gift from parents or ancestors? This can also give rise to capital gains based on how you invest or capitalize the asset. Let us understand its tax implications of capital assets on sale of gifted assets.
- General provision for capital gains computation
- Capital gains on sale of inherited or gifted assets
1. General provision for capital gains computation
The sale of a capital asset held by you will result in short-term or long-term capital gains, depending on the duration for which you have held the asset. The duration for treating an asset to be short term or long term differs from asset to asset.
For instance, a house property held for less than 2 years is short-term whereas if held for more than 2 years would be considered long-term. However, for listed equity shares, the short-term duration is less than 12 months and long-term duration is more than 12 months.
Further, gains from short-term assets are determined by using the simple formula of:
Sale Consideration – Cost of acquisition (Purchase Price) – Cost of improvement
Whereas, gains from sale of long term assets are determined using the below formula:
Sale Consideration – Indexed Cost of Acquisition – Indexed Cost of Improvement
You may see that for long term assets, law provides taxpayers the benefit of indexation, which would help factor in the impact of inflation in price over a period of time.
2. Capital gains on sale of inherited or gifted assets
While the provisions discussed above would apply to assets that have been purchased by the taxpayer, we also need to understand the tax implications when inherited or gifted assets are subsequently sold by the taxpayer.
Capital gains or not?
Any income that arises from the sale of a capital asset, irrespective of whether the asset was initially purchased or inherited, would be considered as capital gains.
Determining Cost of acquisition
Moving on to the computation mechanism, when an asset is gifted or inherited, the taxpayer does not have a purchase price he can attribute to the asset. To address this, the law itself has discussed certain scenarios. This includes a case of gift or inheritance, where the purchase price of the previous owner would be treated as the purchase price for computing capital gains of the taxpayer.
Example, Rahul’s father has gifted him a flat in June 2017. His father had purchased the flat in 2012 for Rs 40 lakh. Rahul proposes to sell this flat in September 2019 for a consideration of Rs 50 lakh. Therefore, Rahul would compute his capital gains from the sale of this flat by considering purchase price of his father i.e. Rs 40 lakh.
Determining period of holding
Many court verdicts and tax tribunals have held that for gifted or inherited property (capital asset), the period of holding should be considered from the time the previous owner acquired it. Based on such period of holding, an asset would be classified as short term or long term.
Therefore, if we have to apply this provision to the example discussed above, the period of holding of the property for the taxpayer, would begin from the year 2012 itself (year of purchase by father) and accordingly, the asset would be classified as long term and the taxpayer can avail himself of the benefit of indexation too.
Frequently Asked Questions
Since you received the asset as a gift, your cost of acquisition will be the same as the cost for your mother and period of holding will start from the day when your mother bought the asset
I received a house property as a gift from my father in 2006, he bought the property in 2004 and later in 2005 he made some improvements to the building, and sold the asset in Feb 2020. Can I consider the cost of improvements made by my father?
Yes, you will consider the improvement cost made by your father and indexation benefit also will be available to you.