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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?s

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. The Invest 4G plan offered by Canara HSBC Oriental Bank of Commerce 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.


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