Capital gains tax when a jointly inherited property is sold

SALE of a capital asset results in a capital gain for the owner of the property. Many a times a property is inherited, sometimes by more than one individual. In India, there is no tax on inheritance; gains are taxed when inheritors sell the property. How are the gains from sale of a property taxed in the hands of several owners?

Long-term or short-term gains

Gains on sale of a property can be long term or short term based on the time period it was held. Property which is held for more than three years results in long term gains and when held for less than three years results in short term gains. For an inheritor, the period for which the property was held by the first owner is included too. For example, Arun & Ravi inherited a property on May 15, 2015 from their father who purchased the property on August 30, 1996. Arun & Ravi decide to sell the property on September 30, 2015. Even though the property is held by them for less than three years, the gains shall be long term since the period for which the property was held by the previous owner, their father, is included too.

Indexation of cost

The cost of acquisition is taken as the same at which the property was acquired by the previous owner. The inheritor also enjoys the benefit of indexation from the date it was first held by the previous owner. In the above case Arun and Ravi can index the cost of acquisition according to the CII of the property for FY 1996-97. Sometimes ancestral houses for which purchase dates are unknown are inherited and sold. If the property has been purchased before April 1, 1981, there is an option of taking the actual cost of acquisition or one can assume the fair market value of the property as on April 1, 1981 as cost of acquisition. Very old properties also go through several significant improvements. Any cost of improvement made to the property afterwards can also be considered. Here is how the indexation is done.

Indexed Cost of acquisition for the purpose of capital gains = Cost of acquisition x [Cost inflation index (CII) of the year of transfer] ÷ [Cost of inflation Index (CII) of the year in which purchased]

Indexed cost of improvement = [Cost of improvement x CII of year of transfer] ÷ [CII of FY of improvement]

Calculation of gains

Long term capital gains are calculated as follows:

LTCG = Net sales proceeds less [indexation cost of acquisition] less [indexed cost of improvement].

Any cost related to the sale are allowed to be deducted from the sale price. Costs such as brokerage or commission paid for securing a purchaser or where property has been inherited, expenditure incurred with respect to procedures associated with the will and inheritance, obtaining succession certificate, costs of executor, may also be allowed in some cases.

Division of gains

The first step is to calculate the gains of the total property. These gains are then divided amongst the owners in the share of their ownership. Each owner reports these gains in their personal tax return. Each owner can choose whether they want to pay tax on the gains or avail exemption by reinvesting their gains. An exemption can be availed from long ter m capital gains tax by reinvesting them in one new residential property situated in India. This exemption is also allowed if a new property is purchased within one year prior to sale date or two years from the sale date. It can also be constructed within three years from the sale date.

It’s up to each inheritor about how they want to treat their capital gains. To avail exemption, proceeds have to be invested before the due date of return filing this year i.e. July 31. If you are not able to buy a house property before due date of return filing, you can deposit the gains in a capital gains accounts scheme and invest as per the specified conditions. You can also purchase capital gains bonds and save tax.

Each of the inheritor must file an income tax return, providing details of this sale and pay tax on gains thereof, or provide details of capital gains exemption claimed.

Gains on sale of a property can be longterm or short-term based on the time period it was held. Property which is held for more than three years results in long term gains and when held for less than three years results in short term gains