Calculating Capital Gains on Inherited Property: Essential Tips

When inheriting or receiving a property as a gift, there are specific tax rules to consider when calculating capital gains on a sale. Here’s a step-by-step look into how it works, based on a scenario where someone inherits a plot and plans to sell it:

• Determining Cost Basis:

For inherited or gifted property, the cost basis for capital gains calculations is usually the amount paid by the original owner. If the property was acquired before April 1, 2001, sellers can use the fair market value (FMV) as of April 1, 2001, as the acquisition cost. To determine this, a valuation report from a registered valuer is required, and the FMV must not exceed the stamp duty valuation of April 1, 2001.

• Holding Period for Long-Term Capital Gains:

The holding period starts from the date the original owner acquired the property, not from the date of inheritance. This extended holding period qualifies the property sale for long-term capital gains, as long as the combined ownership exceeds 24 months.

• Indexation of Cost:

Traditionally, indexation adjusts the acquisition cost for inflation, which reduces taxable gains. However, recent budget changes removed indexation benefits for long-term capital gains on certain assets. For individual taxpayers and Hindu Undivided Families (HUFs), there’s an option to pay tax at either:

• 12.5% without indexation, or
• 20% with indexation.

When using indexation, the benefit is typically applied from the inheritance date. However, some court rulings (e.g., Gujarat, Delhi, and Bombay High Courts) have allowed indexation to start from the date the original owner purchased the property (or April 1, 2001, if FMV is used), potentially benefiting taxpayers.

• Tax Exemptions:

While indexation benefits may not apply, exemptions under Sections 54F (for reinvestment in residential property) and 54EC (for investments in specific bonds) may help reduce the tax on capital gains from a plot sale.

These considerations help navigate tax liabilities effectively when selling inherited or gifted property. Consulting a tax advisor can ensure accurate calculations and clarify any court interpretations applicable to your case.