I inherited grandfather's property. Please explain income tax rules if I sell it
Premium- An inheritance can be either under a Will or can be under personal law in case the person has died without leaving a valid Will.
My grandfather constructed a building in 1989, where all his sons i.e. my father and uncles, got flats. Subsequently a flat in the building was passed on from my grandfather to my father on the death of grandfather in the 1990 and then from my father to my mother in 1998, and upon her demise in 2003, to my brother and me. We have now sold the flat. Will the entire sale proceeds received by us be taxed as we have incurred no cost at all?
Answer: For computing the capital gains, determination of cost of acquisition is very important. So before answering your question, first let us understand how the cost of acquisition is determined for the purpose of taxation of capital gains under the tax laws in case of assets which are not bought by you but have been received by you either as an inheritance or as a gift. An inheritance can be either under a Will or can be under personal law in case the person has died without leaving a valid will. In such cases the cost of acquisition in the hand of present owner is not zero but the cost of the previous owner who had paid for it. Moreover, the holding period, in such cases is to be taken from the date from the acquisition date of the previous owner who had paid for it for determining whether it is a short term asset or a long term asset.
Since your grandfather had incurred the cost for constructing the building, cost of the flat inherited by you and your brother will be proportionate share of your flat in the cost incurred by your grandfather for constructing the building, to start with. Since the flats were constructed before 1st April 2001, you have the option to opt the fair market value of the flat as on 1st April 2001 as your cost of acquisition for the computing the capital gains.
For ascertaining the fair market value of the flat on 1st April 2001, you have can take the stamp duty ready reckoner rates or obtain a valuation report from a registered valuer but the fair market value as per the valuation report cannot exceed the stamp duty rate/circle rate of the flat as on 1st April 2001. Since you will opt for substituting your cost of acquisition by fair market value as on 1st April, 2001, you will have to pay tax on long term capital gains at flat rate of 20% on the difference between the fair market value and indexed cost of the flat in the year of its sale.
There are difference of opinion whether the indexation benefit will be available from the date when the original holder had acquired or from the date when the seller acquired it. The law provides for indexation from date on which the seller got to own the asset but a few tax tribunals have held that the indexation should be allowed from the date when the original holder acquired it or from 1st April 2001 in case the fair market value as on 1st April 2001 is opted.
Moreover, the total holding period of all the previous owner is more than two years the capital gains will be long term capital gains.
Balwant Jain is a tax and investment expert and can be reached on jainbalwant@gmail.com and @jainbalwant on Twitter