Spend, Save and Invest Smartly

Save Tax On Gifted Or Inherited Property





There is a famous saying “What is bought is cheaper than a gift”.

This holds true when the gifts you receive are taxed. Fortunately there is Section 56 of the income tax act which states that the gifts you receive from certain relatives (parents, siblings, spouse) are not taxed. There is also no tax on the property you inherit.



What if you sell your gifted or inherited property?

Yes…you have to pay tax on the capital gains made when you sell your gifted or inherited property. You sell your gifted or an inherited property and make a profit (capital gain).If the property was held and sold for a time period more than 3 years it is a long term capital gain. Your long term capital gain is taxed at 20% with an indexation benefit.

Save on your LTCG using indexation

You can save on your long term capital gains tax using indexation benefits. Prices of goods such as fruits, vegetables, meat, services such as transport, houses, garments and so on increase with time. This is inflation. Indexation basically means you take the effects of inflation into consideration while calculating tax on your capital gains. You have the CII (cost of inflation) index managed by the CBDT (Central Board of Direct Taxes)

Let us consider your father bought the property for INR 20,000 in 1979.You are gifted this property and sold it for INR 25 Lakhs in September 2014.What is the LTCG tax you have to pay on your capital gains? Your father bought the property for INR 20,000 in 1979.You sold this property for INR 25,00,000 in September 2014. You might have noticed that the earliest year in the table is FY 1981-1982.This is the financial year (base year) of the CII Index. Your father bought the property in 1979.Since the property was bought before FY 1981-1982(Prior to 1st April 1981) you have to consider the fair market value of the property as on 1st April 1981 to avail an indexation benefit.

Long term Capital gain = Selling price of the property – Fair market value of the property in 1981(Indexed purchase price of the property).

CII for the year of sale (FY 2014 – 2015) : 1024
CII for the year of purchase (FY 1981 – 1982) : 100
Indexed purchase price of the property


Indexed purchase price of the property = INR 20,000* 1024 / 100 = INR 2,04,800
Long term Capital gain = Selling price of the property – Indexed purchase price of the property.
Long term Capital gain = INR 25,00,000 – INR 2,04,800 = INR 22,95,200.
Your long term capital gain is taxed at 20% = INR 22,95,200 * 20% = INR 4,59,040.
You have to pay an LTCG tax of INR 4,59,040 on the sale of your property of INR 25 Lakhs.

What if you don’t want to pay LTCG at all?

You can make use of Section 54 to save on your long term capital gains tax by selling the property gifted to you by your father and buying a new house.

The capital gain is tax exempt if invested in :

  • The purchase of a residential house/property within 1 year before or within two years of the sale of the property.
  • You construct a new residential house within a time period of 3 years after selling the property.

How much of LTCG tax can you save?

  • If the long term capital gains obtained from the sale of your property is equal to or less than the cost of the new house purchased then the entire capital gain is exempt from tax.
  • If the long term capital gains obtained from the sale of your property is greater than the cost of the new house purchased then the amount up to the cost of the new house is allowed as a tax exemption. The amount which exceeds the cost of the house is taxed at 20% with an indexation benefit.
  • You can purchase only a single residential house/property only within India no matter how high the capital gain.

What if you sell your new house a year after purchase?

  • If you sell your new house in a time period less than 3 years from the date of acquisition ( Date you purchased the house) then the long term capital gains you enjoy under Section 54 are reversed (taken back) and the LTCG will be taxable in the year of transfer of the new house.
  • Your long term capital gain is taxed at 20% with an indexation benefit.
Financial Planning
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