There is a famous saying “What is bought is cheaper than a gift”.

This holds true when the gifts you receive are taxed. Fortunately there is Section 56 of the income tax act which states that the gifts you receive from certain relatives (parents, siblings, spouse) are not taxed. There is also no tax on the property you inherit.

What if you sell your gifted or inherited property?

Yes…you have to pay tax on the capital gains made when you sell your gifted or inherited property.

You sell your gifted or an inherited property and make a profit (capital gain).If the property was held and sold for a time period more than 3 years it is a long term capital gain.

Your long term capital gain is taxed at 20% with an indexation benefit.
 

Save on your LTCG using indexation

You can save on your long term capital gains tax using indexation benefits.

Prices of goods such as fruits, vegetables, meat, services such as transport, houses, garments and so on increase with time. This is inflation.

Indexation basically means you take the effects of inflation into consideration while calculating tax on your capital gains.

You have the CII (cost of inflation) index managed by the CBDT (Central Board of Direct Taxes)

.

Financial Year	Cost of Inflation Index(CII)
1981 - 82	100
1982 - 83	109
1983 - 84	116
1984 - 85	125
1985 - 86	133
1986 - 87	140
1987 - 88	150
1988 - 89	161
1989 - 90	172
1990 - 91	182
1991 - 92	199
1992 - 93	223
1993 - 94	244
1994 - 95	259
1995 - 96	281
1996 - 97	305
1997 - 98	331

 

Financial Year	Cost of Inflation Index(CII)
1998 - 99	351
1999 - 00	389
2000 - 01	406
2001 - 02	426
2002 - 03	447
2003 - 04	463
2004 - 05	480
2005 - 06	497
2006 - 07	519
2007 - 08	551
2008 - 09	582
2009 - 10	632
2010 - 11	711
2011 - 12	785
2012 - 13	852
2013 - 14	939
2014-  15	1024

Let us consider your father bought the property for INR 20,000 in 1979.You are gifted this property and sold it for INR 25 Lakhs in September 2014.What is the LTCG tax you have to pay on your capital gains?

Your father bought the property for INR 20,000 in 1979.You sold this property for INR 25,00,000 in September 2014.

You might have noticed that the earliest year in the table is FY 1981-1982.This is the financial year (base year) of the CII Index.

Your father bought the property in 1979.Since the property was bought before FY 1981-1982(Prior to 1st April 1981) you have to consider the fair market value of the property as on 1st April 1981 to avail an indexation benefit.

Long term Capital gain = Selling price of the property – Fair market value of the property in 1981(Indexed purchase price of the property).

CII for the year of sale (FY 2014 – 2015) : 1024
CII for the year of purchase (FY 1981 – 1982) : 100
Indexed purchase price of the property

Indexed purchase price of the property = INR 20,000* 1024 / 100 = INR 2,04,800

Long term Capital gain = Selling price of the property – Indexed purchase price of the property.
Long term Capital gain = INR 25,00,000 – INR 2,04,800 = INR 22,95,200.
Your long term capital gain is taxed at 20%
= INR 22,95,200 * 20% = INR 4,59,040.
You have to pay an LTCG tax of INR 4,59,040 on the sale of your property of INR 25 Lakhs.
 

What if you don’t want to pay LTCG at all?

You can make use of Section 54 to save on your long term capital gains tax by selling the property gifted to you by your father and buying a new house.

The capital gain is tax exempt if invested in :

How much of LTCG tax can you save?

What if you sell your new house a year after purchase?

You learn from this article that you can sell your inherited or gifted property and still save on your long term capital gains tax.