Long-term capital gains: How tax on the sale of an inherited property is computed?

Three sisters inherited one piece of land in 2003, but it was partitioned among the sisters in 2010. For the indexed cost of the purchase in the calculation of long-term capital gain, should we take the market value as of 2003 (date of inheritance) or the market value as of 2010 (date when the inherited property was partitioned and when the exact divided share of the inherited property was known? We are planning to sell my share of the property, which is duly partitioned. How will the tax be computed?

Since the land is being sold after having been held for more than 24 months, the profits shall be treated as long-term capital gains. In respect of assets that are inherited or received as gifts without consideration, the cost to compute capital gains is taken as the cost incurred by the previous owners who actually acquired them for consideration.

Likewise, the period for which such property was held by all the previous owners, beginning with the person who had acquired it for consideration, shall be included in your holding period.

Understanding Long-Term Capital Gains Tax

If the property was acquired prior to 1 April 2001, the fair market value of the property as of 1 April 2001 can be taken as the cost of acquisition of the person. Please note that the fair market value as of 1 April 2001 can under no circumstance exceed the stamp duty value or circle rate, as it is popularly known.

The benefit of indexation has been done away with by the budget of 2024 with effect from 23 rd July, 2024, except for the limited purpose of computation of actual tax liability on long-term capital gains on transfer of land and building acquired before 23rd July 2024 and sold on or after 23 rd July 2024 by a resident individual or an HUF where the taxpayer has option either to pay tax on long term capital gains @ 12.50% on unindexed long term capital gains or @ 20% on indexed long term capital gains.

Please note that if you wish to avail exemption under section 54F by investing the sale consideration in a residential house or under Section 54EC by investing the long-term capital gains in capital gain bonds, you have to invest the unindexed long-term capital gains.

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Balwant Jain is a tax and investment expert and can be reached at jainbalwant@gmail.com and on @jainbalwant on social media platform X (formerly Twitter)

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