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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 sales – they all are capital gains. In short, capital gains serve as the incentive to investors.

Capital asset includes land, house property, shares, gold, deposits etc. Further, one may determine his gains by reducing the purchase price from the sale price. However, what if you end up selling a piece of land that 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? How will income tax apply and be computed in this scenario? Let us understand these a little more in detail now.

  1. General provision for capital gains computation
  2. Capital gains on sale of inherited or gifted assets

1. General provision for capital gains computation

As mentioned above, sale of a capital asset held by you, will result in capital gains. Such gains could be short-term gains or long-term 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?

First and foremost we need to understand if such sale gives rise to capital gains. The answer is yes. Any income that arises from 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 that he can attribute to the asset. To address this, 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.

Eg. Rahul’s father has gifted him a flat in the June 2017. His father had purchased the flat in 2012 for Rs 40 lakhs. Rahul proposes to sell this flat in September 2018 for a consideration of Rs 50 lakhs. Therefore, Rahul would compute his capital gains from sale of this flat by considering purchase price of his father which is Rs 40 lakhs.

Determining period of holding

Interestingly, while law has discussed how purchase price must be determined in such scenarios, it is silent about what should be considered as the holding period of the asset to determine if the asset is long term or short term.

In this regard, many courts and tax tax tribunals have held that for gifted or inherited property, the period of holding should be considered from the time the previous owner acquired it.

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, he can avail himself of the benefit of indexation too.

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