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Tax On Sale of a Gifted Land



You have been gifted a plot of land by your father. You need money in a hurry and have decided to sell this land. Your worry….Will you be taxed for the profit (capital gain) you get when you sell the plot of land. This land has been gifted to you by your father. Under Section 56(2), gifts from relatives (father), are not taxed in your hands.

What if you sell the plot of land?

Yes…you have to pay tax on the capital gains got by the sale of the plot of land. If the land has been sold after 3 years from its purchase, it is a long term capital gain and you have to pay a long term capital gains tax on it.Your long term capital gain is taxed at 20% with an indexation benefit.

What if the plot of land was bought by your father in 1970?

If the plot of land was bought in 1970, then you would have to pay a long term capital gains tax on it. Long term Capital gain (LTCG) = Selling price of the house – Purchase price of the house. This means you would have to pay a very high LTCG, as the cost of the plot of land would have been very less in 1970. To solve this problem you have the CII index managed by the CBDT (Central Board of Direct Taxes).

What is an indexation benefit?

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.
Understand LTCG tax on sale of a plot of land
Let us consider your father bought the land for INR 25000 in 1970. You have sold it for INR 20 Lakhs in September 2014.

What is the LTCG tax you have to pay on your capital gains?

LTCG tax on the sale of the gifted plot of land using indexation
Long term Capital gain = Selling price of the land – Fair market value of the plot of land in 1981 (Indexed purchase price of the land).
Even though the gifted land was purchased in 1970, the CII index was started in 1981 and this is the base year.

CII for the year of sale (FY 2014 – 2015):1024
CII for the year of purchase (FY 1981 – 1982):100
Long Term Capital gain = Selling price of the land – Indexed purchase price of the land.
Long Term Capital gain = INR 25,00,000 – INR 2,56,000 = INR 22,44,000.
Your Long Term capital gain is taxed at 20% = INR 22,44,000 * 20% = INR 4,48,800.

What if your land was taxed at the cost of acquisition?

Long term Capital gain = Selling price of the land –Purchase price of the land/cost of acquisition

Long term Capital gain = INR 25,00,000 – INR 25,000 = INR 24,75,000.
Your long term capital gain is taxed at 20% = INR 24,75,000 * 20% = INR 4,95,000.
You save INR 4,95,000 – INR 4,48,800 which is INR 46,200 on the LTCG tax by availing indexation benefits on selling your gifted land.
There is a famous saying “Never Look A Gift Horse In The Mouth”. The problem with taxes is they take away the pleasure of gifts. You need to know your taxes before you receive those gifts.

Financial Planning
Tax Planning
Investment Planning