Income tax implications of property sale and gifted proceeds from legal heirs

My father passed away last year without executing a valid Will, leaving behind my mother, a son, i.e. me and my sister. He had bought a residential house in 2009 which has been equally mutated in the name of all the three legal heirs in the municipal records. We are planning to sell this property. We will execute the sale deed, but the sale proceeds will be deposited into my bank account. My mother and sister want to give me their share of the sale proceedsfor me to buy another residential house. Will there be any income tax implications for the entire transaction?

Since the combined holding period for you and your father is more than 24 months, the profits on the same shall be treated as long-term capital gains. After your father's death, the property passes on to the heirs, and the profits will be taxable in their respective hands.

Since you plan to buy another residential house by investing the sale proceeds, you can claim an exemption under Section 54 of the Income Tax Act, provided the investments are made within the prescribed period. Please note that your sister and your mother cannot claim an exemption under Section 54 as they will gift their share of the sale proceeds and not join you as joint owners for buying the proposed residential house. They each will have to pay tax @ 12.50% on the difference between 1/3rd of the cost paid by your father and their share in the sale proceeds.

Understanding Tax Implications of Property Sale

Your mother and sister can avoid this tax liability by gifting the inherited share in the house to you before the actual sale of the house instead of gifting their share in the sale proceeds of the house.

Whether your sister and mother gift you their share in the property or in the sale proceeds, they will not have any tax implications as both are coved within the definition of relatives as per the provisions of section 56(2)(x) of the Act, from whom the gifts received are not to be treated as income.

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Balwant Jain is a tax and investment expert and can be reached on jainbalwant@gmail.com and @jainbalwant his X handle.

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