Indianmoney Facebook Indianmoney twitter Indianmoney LinkedIn Indianmoney Google Plus Indianmoney Youtube Indianmoney Instagram Indianmoney Medium
 
 

Tax On Sale of a Gifted Land

    IndianMoney.com Research Team | Wednesday, June 17,2015, 02:59 PM
 

You have been gifted a plot of land by your father. You need money in a hurry and have decided to sell this land. Your worry….Will you be taxed for the profit (capital gain) you get when you sell the plot of land.

 “ The avoidance of taxes is the only intellectual pursuit that still carries any reward." -  John Keynes

Here’s the good news….

This land has been gifted to you by your father. Under Section 56(2), gifts from relatives (father), are not taxed in your hands.

What if you sell the plot of land?

Yes…you have to pay tax on the capital gains got by the sale of the plot of land. If the land has been sold after 3 years from its purchase, it is a long term capital gain and you have to pay a long term capital gains tax on it.Your long term capital gain is taxed at 20% with an indexation benefit.

What if the plot of land was bought by your father in 1970?

If the plot of land was bought in 1970, then you would have to pay a long term capital gains tax on it.

Long term Capital gain (LTCG) = Selling price of the house – Purchase price of the house.

This means you would have to pay a very high LTCG, as the cost of the plot of land would have been very less in 1970.

To solve this problem you have the CII 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

                    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

 

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.

What is an indexation benefit?

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.

Understand LTCG tax on sale of a plot of land

Let us consider your father bought the land for INR 25000 in 1970. You have sold it for INR 20 Lakhs in September 2014.

What is the LTCG tax you have to pay on your capital gains?

LTCG tax on the sale of the gifted plot of land using indexation

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

Even though the gifted land was purchased in 1970, the CII index was started in 1981 and this is the base year.

 

CII for the year of sale (FY 2014 – 2015):                                 1024

CII for the year of purchase (FY 1981 – 1982):                         100

Long Term Capital gain = Selling price of the land – Indexed purchase price of the land.

 

Long Term Capital gain = INR 25,00,000 – INR 2,56,000 = INR 22,44,000.

 

Your Long Term capital gain is taxed at 20%    =   INR 22,44,000 * 20% = INR 4,48,800.

 

What if your land was taxed at the cost of acquisition?

 

Long term Capital gain = Selling price of the land –Purchase price of the land/cost of acquisition

 

Long term Capital gain = INR 25,00,000 – INR 25,000 = INR 24,75,000.

 

Your long term capital gain is taxed at 20%   = INR 24,75,000 * 20% = INR 4,95,000.

 

You save INR 4,95,000 – INR 4,48,800 which is INR 46,200 on the LTCG tax by availing indexation benefits on selling your gifted land.

 

There is a famous saying “Never Look A Gift Horse In The Mouth”. The problem with taxes is they take away the pleasure of gifts. You need to know your taxes before you receive those gifts.

 

 

IndianMoney.com Research Team

The research team at IndianMoney.com comprises of certified and experienced professionals who share the company's vision to make every Indian financially literate by equipping every Indian with right and unbiased advice. IndianMoney.com research team provides newsletters, articles, videos and FAQs on various financial products and concepts only to help you make wise financial decisions.

/
Get It now!

How about our new look!

 
Great!
Mm.. Ok
Bad