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Capital gain on sale of Gifted assets

dateKnowledge Centre Team dateNovember 5, 2020 views56 Views 4 Minute Read

Capital gain on sale of Gifted assets

Here’s an example to explain capital gain on sale of gifted assets - Raj has received a big, beautiful bungalow on the banks of a river in his native village from a wealthy cousin as a gift. He wants to sell it because with only about 10% extra he will be in a position to buy a home in the Tier II city that he and the rest of the family reside in now. His uncle however cautions him that he should recalculate because he will not receive the entire amount from the sale but will have to pay a percentage as capital gains tax. Raj looks at him perplexed and asks, "A what tax?" He's heard of income tax and value added tax and service tax but this one is new!

If, like Raj, you too have not heard of capital gains tax, you should make yourself savvy with it. It does not come into play when you are gifted an asset, such as a home, but does come into play when you want to sell the said asset.

Peruse and understand the answers to these frequently asked questions pertaining to capital gains tax.

What is capital gains tax?

In most cases, the seller of any asset makes a profit upon sale of the asset. In other words the seller clocks income or earnings. As you are already aware, income and earnings above Rs 2.5L per annum are taxable. The tax paid on the earnings delivered by the sale of an asset is known as Capital Gains Tax.

What gifts is it applicable on? How is it relevant to me?

In most cases and indeed the relevance for most of us is capital gains arising from gifted property. It is relevant to anyone who receives property as a gift and is keen on selling it at a profit.

What is the method for calculation?

There are two methods for calculation depending on whether you plan to sell within three years since you received the gift or more than three years after you received the gift. Depending on your choice you will use either the short term capital gains calculation method or the long term capital gains calculation method. Both calculations take into consideration the amount spent to acquire the asset. In the case of a gifted asset of course, there is no cost involved. Instead one has to ascertain the market value of the asset in order to go ahead with the calculating

Short term capital tax calculation

  • Fair market value of the gifted asset
  • Deduct spends on transfer
  • Deduct spends on improvement = short term capital gain
  • Deduct exemptions
  • Tax is conducted on the final amount after exemptions at prescribed rate for the fiscal and the asset/ capital gain in question and the seller's income tax slab.

Long term capital tax calculation

  • Fair market value of the gifted asset
  • Deduct expenses incurred on transfer
  • Deduct indexed improvement expenses = long term capital gain
  • Deduct exemptions

What is Fair Market Value? How do I calculate Fair Market Value?

You can get this from the stamp duty ready reckoner, which is released annually by the government. It sets specific rates pegged on the area and the nature of construction.

The other alternative is to get a valuation from a company that is specifically registered under wealth tax rules. The remuneration to be paid to the valuer according to is as follows:

  • 0.5% for the first 50,000 of the asset as valued
  • 0.25% for the next 100,000
  • 0.125% for the next 10,000,000
  • 0.0625% for the next 1000,00,000
  • 0.05% for the balance amount

What are these exemptions or exceptions?

The idea of having to pay tax on a symbol of love and affection such as a gift is admittedly a gloomy proposition. But the proverbial silver lining does exist. Not all gifted assets in all situations are subject to capital gains tax.

Moreover the value of the profit is also a deciding factor in whether or not the gains are taxable. Here are some situations and parties who will be exempt

  • When you sell the gifted asset, your annual income is less than Rs 2.5 lakh per annum and you are individual of less than 60 yrs old
  • When you sell the gifted asset, your annual income is less than Rs 3 lakh per annum (and you are a ripe 60+ years old but less than 80yrs old)
  • When you sell the gifted asset, your annual income is less than Rs 5 lakh per annum (and you are a senior above 80 years of age)
  • The gifted asset was a wedding gift
  • The gifted asset was part of your inheritance
  • The gifted asset came from immediate family, that is, from a parent, child or spouse
  • The gifted asset came from the brother or sister of your parent

If you are worried about taxes and are looking to save your annual tax out-go, consider investing in ULIPs. They are market-linked investment products with the dual benefits of life insurance and investment. Moreover, they offer a tax deduction of up to Rs 1.5 lakh under Section 80C of the Income Tax Act. As per Budget 2021, a ULIP policy issued on or after 1st Feb 2021, for which amount of premium payable for any of year during term of policy exceeds Rs. 2.5 Lakhs is not eligible for exemption under section 10(10D) and thus shall be taxable. Thus, profit arising from amount received under such ULIP shall considered as ‘Capital Gain’.

The Invest 4G plan offered by Canara HSBC Life Insurance is a solid ULIP product to consider investing in.

That about sums up everything you need to know about capital gains related to gifted assets. Read our blog post about calculation for long term and short term capital gains to understand the finer nuances.

Hi, I am Radhika Palkar, a practicing Chartered Accountant associated with an esteemed CA firm based out of Mumbai. Mainly working as an advisor to foreign companies in managing their operation in India and administering and looking after them. I am here today as part of the Tax video series for Canara HSBC Life Insurance Company.

In today's video, I talk about Capital Gain applicability on gifted assets. I will start with a brief explanation of Capital Gain on assets before I dwell on the subject of gifted assets and the capital gain applicable.

Capital gain introduction

Section 45(1) of the income tax act provides that any profit or gain arising from the transfer of capital assets effected in the previous year will be chargeable to income tax under the head 'capital gains' in the year in which such transfer took place.

The duration of holding the capital asset before its transfer is used to determine whether it is Short Term.

Capital Gain or Long term Capital Gain. Gain on sale of a capital asset held for more than 36 months before the date of its transfer is termed as Long Term Capital Gain, otherwise, it is Short Term Capital Gain.

However, the duration for treating an asset to be short-term and long-term differs from asset to asset.

Broadly, speaking the three important points to be considered in computing Capital Gains are

  • Cost of acquisition of the Capital Asset,
  • Period of holding such asset Sale consideration.
  • Now let's discuss Capital gain on the sale of gifted assets

Any income that arises from the sale of property obtained as a gift would be considered as a capital gain on a gifted asset. The mere dictionary definition of the word "Gift" doesn't exclude it from being taxed in India.

The 3 points mentioned above have to be considered at the time of computing the capital gain even on gifted assets.

Let's discuss what the Cost to the previous owner is, in the case of gifted assets:

As per section 49(1), in the case of a gifted asset, the cost of acquisition of the asset shall be deemed to be the cost of acquisition of the previous owner. To this cost, the cost of improvement to the asset incurred or borne by the previous owner or the assessee must be added.

Period of Holding

Where the capital asset became the property of the assessee under a gift or will, the period of holding of the asset by the previous owner shall also be considered for determining the period for which capital asset is held by the assessee.

Indexation benefit

Indexation benefit in respect of gifted assets shall apply from the year in which the asset was first held by the assessee or from the year in which the same was first acquired by the previous owner.

Cost inflation (Index) for the financial years so far has been notified by the central government.

For Example:

Mr. A acquired a residential house in April 2006 for Rs. 1,25,000 and thereafter gifted this property to Miss B as a token of love and appreciation on 1st March 2007. The property so gifted was sold by Miss B on 30th June 2020. The consideration that miss B received was Rs. 30,00,000.

Computation of capital gain of Miss B for A.Y.2021-22

Particulars Amount
Full Value of consideration 30,00,000
Less:-Indexed cost of acquisition 3,08,402
(Rs. 1,25,000 x301/122)
Long Term Capital Gain 26,91,598

Note 1: As per section 49(1), the cost of acquisition of the residential house gifted by Mr. A to Miss B would be the cost for which Mr. A acquired asset that is rupees 1,25,000. This cost of acquisition of rupees 1,25,000 would now become rupees 3,08,402 by applying for the indexation benefits.

Thus, the long-term capital gain would be rupees 26,91,598 in this case, for the capital gain holding period will be considered from the date on which the house was acquired by Mr. A.

Exceptions :

The idea of having to pay tax on a symbol of love and affection such as a gift is admittedly a gloomy proposition. But the proverbial silver lining does exist. Not all gifted assets in all situations are subject to capital gains tax.

Some examples of such exceptions are :

The gifted asset was a wedding gift
The gifted asset was part of your inheritance or was received under a will
The gifted asset came from a relative as defined under the Act


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