Ltcg taxability in case of legal heir

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

07 July 2013 Hi Experts

Two brothers becomes legal heir after the demise of third brother(Not by any Will/ document)just by right.These two brothers( Legal heirs) wants to sell this property and after selling this property wants to give one share to their sister's daughter as the sister is not alive. Now my query is how this LTCG will be calculated ? whether it can be shared equally among this brothers after deducting index cost of acquisition? How they can avoid tax on capital gain whether by buying investing separately or by jointly ? How to deal with the share which they would like to gift to their sisters daughter ? Please help me

Querist : Anonymous

Querist : Anonymous (Querist)

08 July 2013 Hi ,

Please anybody can help in this ?

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
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03 August 2024 When it comes to Long-Term Capital Gains (LTCG) on the sale of inherited property, the tax implications and strategies can be intricate. Let’s break down your scenario and address your queries step-by-step:

### **1. Calculation of LTCG**

**A. Cost of Acquisition**

Since the property was inherited, the cost of acquisition for calculating LTCG is the cost at which the deceased had acquired the property. You also need to consider the indexation benefit.

1. **Indexed Cost of Acquisition**: For LTCG calculation, the cost of acquisition is adjusted for inflation using the Cost Inflation Index (CII) provided by the tax authorities. This indexed cost is used to determine the capital gains.

2. **Cost to Legal Heirs**: The cost of acquisition for the legal heirs is the same as the cost for the deceased, indexed to the year of the sale.

**B. Sale Proceeds**

The sale proceeds of the property are divided among the legal heirs based on their share in the inherited property.

**Example Calculation**:
- Suppose the property was acquired by the deceased in 1990 for ₹10 lakh.
- Indexed cost for 1990 (using CII values) is calculated and then adjusted to the year of sale.
- Let’s say the property is sold for ₹50 lakh in 2024.

LTCG = Sale Proceeds - Indexed Cost of Acquisition

### **2. Distribution of LTCG Among the Legal Heirs**

Since the property is inherited equally by the two brothers:

- The LTCG should be divided equally between the two brothers.
- Each brother’s share of LTCG will be calculated based on their respective share of the sale proceeds.

### **3. Tax Avoidance Strategies**

**A. Reinvestment in Property**

Both brothers can claim exemptions under Section 54 of the Income Tax Act by investing the capital gains in a residential property. This can be done individually or jointly:

- **Individually**: Each brother can invest their share of LTCG in residential property to claim exemption.
- **Jointly**: They can jointly invest in one or more residential properties, but the exemption will be applicable proportionately based on their individual shares.

**B. Investment in Bonds**

Alternatively, under Section 54EC, investing the LTCG amount in specified bonds (like those issued by NHAI or REC) within 6 months of the sale can also provide exemption.

### **4. Gift to Sister’s Daughter**

If the brothers decide to gift a portion of the sale proceeds to their sister’s daughter:

- **Gift Tax**: In India, gifts to relatives are not taxable in the hands of the recipient. Hence, there will be no gift tax issue if the gift is given to a relative.
- **Impact on LTCG Calculation**: The gift itself does not affect the LTCG calculation, but it is important that each brother accounts for their share of the gains when they file their tax returns.

### **Steps to Follow**

1. **Determine the Indexed Cost**: Calculate the indexed cost of acquisition for the property based on the date of acquisition and sale.

2. **Calculate LTCG**: Subtract the indexed cost from the sale proceeds.

3. **Distribute LTCG**: Divide the LTCG equally between the brothers.

4. **Plan Investments**: Consider reinvesting the LTCG into residential property or specified bonds to claim exemptions.

5. **Handle Gifts Appropriately**: Ensure the gift to the sister’s daughter is documented properly and is compliant with tax laws.

Consulting a tax advisor or financial planner is highly recommended to ensure accurate calculation and compliance with current tax regulations. They can also help in strategizing the best way to invest the gains and handle the gifting process.

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