Capital gains tax computation on sale of inherited property

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Sreenivas Murthy (Querist)

01 January 2013 Dear Sir,

My father in law purchased a house in March 2001 for 4 lakhs. Upon his death in Sep 2011, my wife inherited the house (sole heir). We sold the house in July 2012 for 30 lakhs.

My query is regarding the tax implication for the sale of this house.

Since my wife came into possession of the house in 2011 and sold it in 2012, does the gain arising from the sale qualify as a short term capital gain or does it qualify as a long term capital gain?

Assuming that the cost of indexation is taken from the year 2001 onwards (the original date of purchase), I calculated the indexed cost of acquisition to be:

(Purchase value * CII for 2011-12)/(CII for 2001-02) = 400000*785/426 = 737089.

So, the capital gain would work out to be:

Sale price - indexed cost of acquisition =
3000000 - 737089 = 2262910

My wife does not have any other income, so removing the zero slab limit from the long term capital gain, the net LTCG would be 2262910 - 200000 = 2062910

So, the tax liability would work out to 0.2 * 2062910 = 412582

My questions are:

1] Assuming that we treat this transaction as a long term capital gain, is the derivation above correct?
2] How would the calculation be modified if this transaction were to be treated as a short term capital gain?
3] Will investment into PPF reduce the LTCG tax liability?

Looking forward to your help on the same.

CA PARAS BAFNA

CA PARAS BAFNA (Expert)

01 January 2013 In Numerator you have to take 852 (785)and in Denominator you have to take 406 (426).
.
1. It's a long Term Capital Gains Case.
2. No need of Modification in your case.
3. Investment in PPF will not reduce the liability.
.....
If you invest capital gains amount in New Residential house you can save Capital Gains Tax. .

Message likes : 1 times

Sreenivas Murthy

Sreenivas Murthy (Querist)

15 January 2013 Thank you for your response Sir !

So the final calculation would be:

Indexed cost of acquisition = 400000 * 852 / 406 = 839409
Capital gains = Sale price - 839409 = 3000000 - 839409 = 2160591

Removing the zero slab limit, the capital gains will be = 2160591 - 200000 = 1960591

Tax on long term capital gains = 0.2 * 1960591 = 392118.2

Education cess = 392118.2 * 0.03 = 11763.5

Total tax payable = 392118.2 + 11763.5 = 403881.7

Unfortunately, we wont be able to invest in a different property or in NHAI bonds due to our current circumstances..

Kindly confirm if the total tax payable figure arrived at above, is accurate.

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