My father bought a plot and gifted me. I sold it. How income tax is calculated?


My father had bought a plot of land in 1995 for Rs. 50,000. He transferred the same to me during the financial year 2021-22 as a gift.  The stamp duty ready reckoner value at the time of transfer was Rs. 25 lakhs. I have sold it during the current year for Rs. 28 lakhs. What is my tax liability? Is the profit of Rs. 3 lakhs short term gain or long term?

Answer: Please note that your profit is not 3 lakhs only. For the purpose of computing capital gains in respect of property received as gift from specified relatives which is exempt under Section 56(2)(x) or as inheritance, the cost incurred by the original owner who had acquired it for consideration is treated as the cost of the seller. However, if the property was acquired by such owner before 1st April 2001, the fair market value (FMV) of such property as on 1st April 2001 can be taken as cost, at the option of the taxpayer. However, under no circumstances the FMV of such asset can be higher than the stamp duty rate.

Though the language used the law contemplates that the computation of holding period should commence from the date when the seller became owner of the property but various judicial authorities have held that for the purpose of computing the holding period to determine whether the capital gains are short term or long term, date on which the asset was originally purchased should be taken and indexation should also apply from that date. In case the FMV as on 1st April 2001 is taken as the cost then the indexation shall also apply from that date. 

So you have the option to take FMV on 1st April 2001 as your cost and apply the indexation from 1st April 2001. The difference between the indexed cost and net sale price is your long term capital gain.

Balwant Jain is a tax and investment expert and be reached on [email protected] and at @jainbalwant on his twitter handle.

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