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How to calculate capital gains and tax liability on inherited

property
BY ET CONTRIBUTORS | JUL 10, 2017, 06.30 AM IST Post a Comment

Shobhana has inherited a non-agricultural plot worth Rs 10 lakh from her late
grandmother. The plot was bought before 1980. What are the tax implications for
Shobhana? Will she have to pay tax on her inheritance, considering the plot will be
transferred in her name?

What if she wants to sell the property? Will the proceeds be fully tax-exempt, since she
only inherited it and did not acquire it? Considering that no cost of acquisition is available,
how will she compute the gains for taxation purposes?

There is no tax liability for Shobhana at the time of inheritance. However, any profits made
on the sale of inherited land are taxable as capital gains. This implies that should The LTCG shall be computed as the difference
Shobhana decide to sell it, capital gain from sale of the inherited property will be fully between net sale proceeds and indexation cost of
acquisition.
taxable in her hands. Therefore, it is important that she secures the documents
substantiating the inheritance of land.
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Having said that, the period of holding will be considered from the date of purchase by her
grandmother. The cost at which her grandmother bought the house prior to 1980 shall be considered as cost of acquisition. But since the
cost of the land is not available and the same has been acquired before 1 April 1981, fair market value of the land as on 1 April 1981
can be considered as the cost of acquisition. For ascertaining the same, Shobhana must engage the services of a registered valuer.

The LTCG shall be computed as the difference between net sale proceeds and indexation cost of acquisition. For indexation, the cost of
acquisition should be adjusted by applying the cost inflation index (CII). CII for 1981-82 and the financial year in which Shobhana sells
the property will be considered.

The year of inheritance has no importance in the calculation of long-term capital gains. She can also add the costs incurred with respect
to procedures associated with the will and inheritance, obtaining succession certificate, costs of executor, property valuer etc. while
computing the cost of acquisition.
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In case there are any residual capital gains, Shobhana may have to either pay tax on it at the rate of 20% or save capital gains tax by
buying specified bonds u/s 54EC.

(The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti
Bhargava and Labdhi Mehta.)

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7/14/2017 How to calculate capital gains and tax liability on inherited property - The Economic Times
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