Understanding capital gains calculation on inherited property: Key considerations for selling a plot of land

My late father bought a plot of land in 1999. The exact cost he paid is not available. He gifted it to me in August 2022 through a duly executed gift deed on which proper stamp duty was paid. Now, I am planning to sell this plot for two Crore rupees in November 2024. Can you help me understand how to compute the capital gains? Would the indexation be done from 1999 or from 2022?

In respect of capital assets received as gifts or inheritances, the cost for the purpose of computation of capital gains is to be taken as the amount which was paid by the original owner who had acquired it for consideration. Moreover, in case the asset was purchased before 1st April 2001, the seller can adopt the fair market value of the asset on 1st April 2001 as his cost of acquisition. Since the plot in question was purchased before 1st April 2001, you can take the fair market value of the plot as of 1st April 2001 as your cost. To arrive at the plot's fair market value, you need to obtain a valuation report from a registered valuer.

The fair market value, as per the valuer's report, can under no circumstance be higher than the stamp duty valuation as of 1 April 2001.

Moreover, for computing the holding period, the period starts from the date the same was acquired for consideration. So your holding period would start from 1999, and the capital gains would be treated as long-term capital gains as the combined holding period is more than 24 months.

Though the recent budget has eliminated indexation benefits for the computation of long-term capital gains, a resident Individual and a HUF can still choose to pay tax on long-term capital gains arising on the sale of land or buildings at a lower of 12.50% on long-term capital gains computed without indexation or at 20% on long-term capital gains computed with indexation.

How to Calculate Tax on a Gifted Plot of Land

Though the law allows you to take the cost incurred by the previous owner as your cost of acquisition as well as the holding period of the previous owners in case the asset is received as gifts but does not explicitly provide that the indexation benefit shall also be available from the date on which the paid for previous owner acquired it. So strictly speaking, though, you can take the property's fair market value as of 1st April 2001 as your cost, but the benefit of indexation would be available to you from August 20122 if one goes by the wording of the provisions. However, some of the high courts, like Gujarat High Court, Delhi High Court and Bombay High Court, have held that since the cost of the previously paid-for owner is to be substituted, the indexation should also be allowed from the date of purchase by the previous owner or 1-4-2001 in case fair market value as on that date is adopted.

Please note that you do not have the indexation benefit available for computing capital gains to avail yourself of the exemption under Sections 54F and 54EC regarding a plot of land.

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