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Short-term capital gains are taxable at income tax slab rates in the year of sale

LiveMint logoLiveMint 25-09-2017 Parizad Sirwalla

How is inherited property taxed? I got a house from my parents and want to sell to a builder for redevelopment. 

—Piyali Seth

The inheritance of the property itself is not taxable in either the hands of your parents or you.

The sale of an inherited property shall be taxable as capital gains in your hands. 

Depending on the period of holding of the property by you (including your parents from whom you have inherited the property), the resultant gains are taxed either as long-term capital gains (LTCG) or short-term capital gains (STCG). 

If the aggregate period of holding is more than 24 months, any gains are termed as LTCG. This is computed as the difference between net sale proceeds and the indexed cost of acquisition or improvement. Indexation refers to adjusting the cost for inflation, by applying the Cost Inflation Index (CII) notified by the tax authorities in the year of purchase or improvement by the original owner and the year of sale, respectively.

The cost incurred by your parents to purchase or improve this property can be considered as your cost of acquisition for this calculation. If they had acquired the property before 1 April 2001, you have the option of using the fair market value of the property as on 1 April 2001, as the cost of acquisition.

Under the recently amended tax law, the capital gain arising to an individual, from the transfer of land or building or both, under a registered agreement permitting the development of a real estate project, is taxable in the financial year in which the competent authority that approved the building plan, issues a certificate of completion for either the whole or part of the project. 

If you hand over the plot of land to the builder, you will be liable to pay capital gains tax in respect of the real-estate development transaction in the year in which such a completion certificate is issued. You will also be liable to tax on any further sale of flats that are acquired by you under the development transaction.

There are certain specified exemptions from LTCG where the gains are reinvested by you to buy a residential house or specified investments. 

I am a co-borrower along with my father for a home loan because he is older than 70 years and the bank insisted on a younger co-borrower. But he is giving the down payment and the EMIs. What would be the tax implication for both of us if we sell this property? 

—Ashu Singh

If you are merely a nominal co-borrower of the housing loan and you do not co-own this property, your father would be treated as the sole owner of the property from an income tax perspective. Hence, he should then be liable to pay taxes on any gains arising from the sale of this property. 

If the property has been held for more than 24 months before being sold, the resultant gains are taxable as long-term capital gains (LTCG) in your father’s hands. The difference between net sale proceeds and the indexed (adjusted for inflation between the year of purchase and sale) cost of acquisition and improvement is taxed as LTCG at the rate of 20.6% (excluding surcharge). 

There are certain specified exemptions from LTCG tax where the gains are reinvested by your father in the purchase of a residential house or specified investments. 

If this property is held for 24 months or less, the gains resulting from the sale are taxable as short-term capital gains (STCG). The STCG is computed in a manner similar to LTCG, but indexation of costs is not allowed. The exemptions available for reinvestment are not available when the gain is a STCG and further the STCG is taxable at the income tax slab rates applicable to your father in the year of sale as increased by any surcharge, if applicable and education cess at 3%.

My PPF account will mature next month. I want to keep some of the money and reinvest the rest in PPF itself. Will I be taxed on the money that I do not reinvest? 

—Anuj Gupta

The Public Provident Fund (PPF) withdrawn by you (fully or partially) on maturity would not be taxable. 

The interest accrued in your PPF account should be reported in your tax return form in each year (as exempt income), to be compliant from a reporting perspective.

You should check with your bankers on the manner in which you can re-invest your PPF account funds upon maturity.

If we invest the monetary gifts that we have received on our wedding, will there be tax on the returns from the investments? 

—Kartik Kumar

The monetary gifts received on the occasion of your marriage would not be taxed in your hands as income. But any income (for example, interest) that you or your spouse receive from investing the money you got as gift will be taxable, unless the investment is made into a scheme that allows tax-free returns (such as, equity-oriented mutual funds, PPF, or others).

Parizad Sirwalla is partner (tax), KPMG.

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