How to avoid paying capital gains tax on inherited property Form

Long Term Capital Gain Tax. All you need to know about LTCGOff late one of my relatives has sold some real estate property in his locality. Due to this sale transaction, he received a notice from the Income Tax authority asking him to pay Long Term Capital Gain Tax for Rs.30 Lakhs. I helped him to the best of my ability and made a compliance with the provision of law. That incident prompted me to write a blog post on Long Term Capital Gain Tax. All you need to know about LTCG. I will try to bring forth every aspect of LTCG before you with very easy examples so that this post helps others in some complicated tax matters.Long Term Capital Gain TaxTransfer of Capital Asset generates two types of Capital Gains viz; Long Term and Short Term. Today I will discuss only on Long Term Capital Gain.As per Section 45(1) of the Income Tax Act, Capital Gain would arise if the following conditions are satisfied:? Transfer of Capital Asset (U/S 2(14). It has to be a Capital Asset;? Profit or Gain i.e. Capital Gain should arise out of such transaction;? It is charged to tax in the year of transfer i.e. in which year the transaction took place;? This capital gain should not be exempted U/S 54 of the I.T Act;? No transfer of personal effects such as TV, Laptops, personal cars and etc;What is Long Term Capital Asset:An asset is called long term capital asset if it is held for more than 36 months. This period of 36 months has been reduced to 24 months in case of immovable properties such as land, building and house property w.e.f F.Y 2017-18.However, for some movable assets, the holding period is still 36 months and not 24 months such as jewellery, paintings, antiques, Bonds, Govt. securities and Debt oriented mutual funds.In case of listed equity shares or stocks, units of equity oriented mutual funds and debentures, if they are held for more than 12 months, they will be termed as long term capital asset. For unlisted securities or shares the holding period is 24 months for long term capital asset as per Section 2(42A) of the IT Act, w.e.f F.Y 2017-18 .Treatment of Long Term Capital Gain Tax on the sale of propertyNow, before going into the details, let's just see how to compute LTCG i.e. the format for LTCG computation.Computation of Long Term Capital GainParticularsAmount(INR)Amount(INR)Full Value Consideration of the property*******Less: Expenses on Transfer****Net sale consideration*****Less: Indexed cost of acquisition*****Less: Indexed cost of improvement**********Gross Long Term Capital Gain*******Less: Exemptions if any U/S 54****Long Term Capital Gain taxable in the hands of the Assessee*****Here,Full Value Consideration means the amount of consideration received or to be received either in full or partial on such transfer of capital asset. This should also be kept in mind that here Sale means the actual transfer or Deemed transfer.Expenses on Transfer means the amount of expenses incurred for effecting the transfer process such as Advertisement expenditure, Brokerage to an agent, Stamp Duty, Registration fees, and legal expenses.Cost of acquisition means the actual amount of money the assessee has paid to acquire the original capital asset. In simple terms, the actual purchase price of the property transferred or to be transferred. But if any capital asset is owned by a person from inheritance i.e. in case of the ancestral property the cost of acquisition in the hands of the assessee is nil.Cost of improvement means the amount of money incurred during the ownership of the property for maintenance or improvement of the property.Indexed cost means adjustment of the previous cost with inflation rate or index rate. To be precise, if Rs.100 was incurred in 2023. what would be the current cost after giving indexation benefit in 2018.You may also be interested in:What is BSBD account? Basic Savings Bank Deposit accountHow to estimate retirement corpusHow to calculate mutual fund returns in excelNow, let's just take an example for easy understanding of how Long Term Capital Gain Tax arises and how to calculate it?Example 1: Mr Subhas had acquired a residential property for Rs. 11,00,000 in the year 1996. In 2023 he decided to sell his residential property for 57,00,000. Mr Subhas incurred the following expenses to execute this Belgrade Airport Shuttle Taxi Transfer.RS.8000 for Advertisement exp. Rs.57000 as brokerage fees. Rs.330000 as registration fees and Rs. 25000 as Legal expenses.He also incurred Rs.80,000 in 2023 for his house painting works. Index cost in 1996 was 305, for 2023 was 426 and for 2023 it was 1125. Now, just calculate how much Long Term Capital Gain Tax Mr Subhas will have to pay in 2018?Computation of Long Term Capital Gain Tax of Mr Subhas using the above table.Computation of Long Term Capital GainParticularsAmount(INR)Amount(INR)Full Value Consideration of the property57,00,000Less: Expenses on Transfer4,20,000Net sale consideration(A)52,80,000Less: Indexed cost of acquisition1100000*(1125/305)=40,57,377Less: Indexed cost of improvement80,000*(1125/426)=2,11,268(B)42,68,645Gross Long Term Capital Gain10,11,355Less: Exemptions if any U/S 540Long Term Capital Gain taxable in the hands of Mr SubhasRs.10,11,355Therefore, Mr Subhas has to pay Rs. 2,14,407(1011355*20%)+3% Education Cess as Long Term Capital Gain Tax.Live practical example to eradicate complicacy in understanding and paying Long Term Capital Gain TaxNow take another live example of my uncle which I already mentioned at the beginning of this post.My uncle had purchased one plot of land in the year 1984 for Rs. 10000 only. This land had three co-owners including my uncle with equal share each. In the year 2023. all the co-owners decided to assign a promoter to construct residential flats on that land and executed one power of attorney in the name of the developer. It was decided in the agreement to share the total revenue in 70:30 ratio between the developer and the co-owners. In the year 2023. the Fair Market Value of that land was fixed at Rs. 2.10 Crores by the Income tax authority. Out of the total commutable area, my uncle's share was around 2400 square feet only and 200 Sq. feet for a parking garage. As per the I.T valuer, the fair market valuation was fixed at Rs.1250/Sqr ft. for flat and 50% i.e. Rs.625 for the parking garage for the year 2013.LTCG Tax implicationsHere, one point is to be kept in mind that though in the year 2023 my uncle did neither receive any consideration nor any sale transaction was made. But then why the Income Tax authority sent LTCG tax notice. It's because of deemed transfer. This means at the time of entering into the agreement with the developer of flats, it was provisioned as a sale transaction since the ownership of the capital asset was transferred in the ratio of 70:30.What will be his LTCG tax liabilityThis is needless to mention that his deemed sale consideration will not be Rs.70 lakhs(2.10 Cr/3). Since it was not a sale of a land transaction rather building a residential complex on our behalf. In that case, the long term capital gain tax is to be computed as below.Computation of Long Term Capital Gain Tax on propertyParticularsAmount(INR)Amount(INR)Full Value Consideration u/s 50C read with 50D of the I.T Act(2400 X 1250)?3,000,000.00Full value consideration for parking lot(200 X 625)?125,000.00Total sale consideration?3,125,000.00Less: Expenses on Transfer?0.00Net sale consideration?3,125,000.00Less: Indexed cost of acquisition(10000 X 852/125)?68,160.00Gross Long Term Capital Gain?3,056,840.00Less: Exemptions if any U/S 54?0.00Long Term Capital Gain taxable in the hands of my uncle?3,056,840.00Now, he has to pay long term capital gain tax of Rs.6,11,369(3056840*20%)+3% E. Cess.LTCG tax rate: LTCG tax as fixed by the IT Act is 20% + 3% Education Cess. However, if the assessee does not have any other taxable income, out of the total capital gain basic exemption limit of Rs.250000 or Rs.300000 for senior citizen only would be exhausted first and LTCG tax would be applicable on the balance LTCG. This means the IT Act provides some relief for those who do not have any other income or has income below the basic exemption limit.How to avoid payment of Long Term Capital Gain Tax on the sale of land or residential building as per above practical examplePayment of LTCG tax can be avoided in the following two ways or in other words, there are exemptions u/s 54 and 54 EC of the I.T Act.Exemption u/s 54 of the I.T Act.Exemption from Long Term Capital Gain tax u/s 54 of the I.T ActNew asset to be acquiredResidential House PropertyAmount to be invested in new assetLong term capital gain arose on transferExemption limitAmount invested in the new residential house or capital gain whichever is lowerTime limit for investment1. For purchase: Within one year before or two years after the date of transfer2. For construction: Within 3 years after the date of transferUnutilized amount if any1.If any amount remains unutilized before the due date for filing of the return, it should be kept in Capital Gain Account Scheme.2. Thereafter, this unutilized amount should be utilized within the specified time period.3. If any amount could not be utilized, it shall be treated as Long Term Capital Gain in the previous year in which the specified time period expires.Holding periodThe new residential house property so acquired should be held for 2 years(w.e.f F.Y 2017-18) from the date of acquisition or construction.Exemption u/s 54EC of the I.T Act.Exemption from Long Term Capital Gain tax u/s 54EC of the I.T ActNew asset to be acquiredBonds redeemable after 5 years issued by National Highway Authority of India (NHAI) or Rural Electrification Corporation Ltd.(RECL).Amount to be invested in new assetLong term capital gain arose on transfer. The maximum amount that can be invested by a person in a financial year is Rs. 50 Lakhs. And from F.Y 2014-15 aggregate of maximum investment in this bond is restricted to Rs.50 Lakhs irrespective of financial year.Exemption limitAmount invested in bonds or capital gain whichever is lower subject to maximum Rs.50 Lakhs w.e.f F.Y 2018-19.Time limit for investmentWithin 6 months from the date of transfer.Other restrictionIf exemption has been availed u/s 54EC, investment in this bond cannot be claimed for deduction u/s 80C.Holding period in bond investmentInvestment in this notified bonds shall be kept for minimum 5 years w.e.f F.Y 2018-19 as introduced from 1.04.2023 in Budget 2023. Otherwise, exemption availed of u/s 54EC shall be treated as LTCG in the year of such sale of a new asset.Final words on Long Term Capital Gain Tax. All you need to know about LTCGI hope I have done enough justice on this blog post. I have tried to keep all the discussions very simple and lucid so that everyone can take advantage of this learning. If you like my work kindly share with others for the benefit of all.

Before we start, I am assuming that u201cby legacyu201d you mean u201cinheritedu201d and the question relates to India.Income tax provisions for sale of an inherited property and the accrued capital gains, are different from a property that is obtained through other means, such as outright purchaseThere is considerable confusion over the taxes applicable on the sale of an inherited property. While many think that the money received on sale of an inherited house is fully tax exempt, others feel that it is fully taxable.In reality, there is no tax liability when you inherit the property. However, any profits made on the sale of an inherited property, are taxable as capital gains.Computation of capital gainsA capital gain can either be short term, or long term, depending on the period for which the asset was held.If the inherited house is held for more than 24 month (2 years), it is treated as a Long Term Asset and taxed at Long Term Capital Gains (LTCG) rate on 20.6%. This period of 24 months includes not only the period for which you held the house, but also the period for which it was held by the previous owner/s who had paid for it.For a holding period of less than 24 months, the actual cost of acquisition and any cost of improvement are deducted and the balance amount is treated as Short Term Gains and taxed at the Income Tax slab rate applicable to you. If the combined holding period exceeds 24 months, you get the right to deduct the cost of acquisition and the cost of improvement as enhanced by the cost inflation index multiplier. The cost inflation multiplier is calculated, based on the cost inflation index of the year of purchase and the year of sale.The cost of acquisition will be the amount paid by any of the previous owners, towards the purchase of the immovable property. For example, consider a scenario, where you inherited a house from your father and he had inherited it from his father. If your grandfather had purchased the house for Rs 50,000, your cost of acquisition for capital gains purposes shall be Rs 50,000. Moreover, in case the house was inherited before 1st April 1981, you may substitute the fair market value of the property as on 1st April 1981 for the u2018cost of acquisitionu2023 and apply the cost inflation index multiplier on that value.Calculate your Capital GainsHaving said that, you can avoid Long Term Capital Gains Tax totally by investing the sale proceeds into buying new property.In case the Property sold / transferred is a residential house, and if out of the capital gains, a new residential house is constructed within 3 years, or purchased 1 year before or 2 years after the date of transfer, then exemption on Long Term Capital Gain is available on the amount of investment in the new asset to the extent of the capital gains.It may be noted that the amount of capital gains not appropriated towards purchase or construction of a new house within 3 years may be deposited in the Capital Gains Account Scheme of a public sector bank before the due date of filing of Income Tax Return. This amount should subsequently be used for purchase or construction of house.I hope it helps.Cheers!AB

How long do you have to buy to buy another house to avoid capital gains taxes?I rephrased your question slightly. In the United States, if the house in question has been used as your residence for at least two of the previous five years, you probably will not have any capital gains tax liability. If you do have a capital gain tax liability, it means that your home shot up in value. A single person can exempt $250,000 in capital gain from taxes and a married couple can exempt $500,000 in capital gain.If the house in question was being used as an investment property then you will need to do a 1031 or Starker exchange. There are strict time limits on identifying and closing on the property to be exchanged. You can find this information easily by searching Starker exchange. If you go this route use a Realtor familiar with such exchanges and get an Attorney or Title Company on board early. You need to do this correctly. A 1031 will not exempt you from capital gains. It just allows you to defer the taxes into the future.

Overview of Capital Gain Tax on Sale of House or PropertyThe time period: Check the time period between when you bought the house/property and when you sold it. if you have inherited the property the period of holding will be considered from the date of purchase by your ancestors.If a property is sold within two years(from FY 2017-18 earlier was three) of buying it, it is treated as a short-term capital gain. This is added to the total income and taxed according to the slab rate.If a property is sold after two years (from FY 2017-18 earlier was three) years from the date of purchase, the profit is treated as a long-term capital gain(LTCG) and is taxed at 20% after indexation.The Purchase cost and Fair Market Value: If the property is purchased before 1 Apr 2023 then the fair market value of the property as on 1 April 2023 can be considered as the cost of acquisition. For ascertaining the Fair market value, it is best to engage the services of a registered valuer. Our article Fair Market Value: Calculating Capital Gain for property purchased before 2023 covers it in detailHouse improvement cost and transfer cost: While computing the cost of acquisition one can also add the costs incurred with respect to procedures associated with house improvement or transfer cost such as the will and inheritance, obtaining succession certificate, costs of the executor, property valuer etc.Find the indexation purchase cost: The long-term capital gain(LTCG) shall be computed as the difference between net sale proceeds and indexed cost of purchase. For indexation, the cost of acquisition should be adjusted by applying the cost inflation index (CII).Find the capital gain. Check out our Capital Gain Calculator from FY 2017-18 with CII from 2001-2002For short-term capital gain = final sale price u2023 (the cost of acquisition + house improvement cost + transfer cost).In case of long-term capital gain, capital gain = final sale price u2023 (transfer cost + indexed acquisition cost + indexed house improvement cost).Saving Long Term Capital Gain: If there are any long-term capital gains,one may have to eitherpay tax on it at the rate of 20% orBuy a new propertyeither 1 year before the sale2 years after the sale of the property/asset ORThe new residential house property must be constructed within 3 years of the sale of the property. ORSave capital gains tax by buying specified bonds u/s 54ECCapital Loss: Set off of Capital Losses: The Income Tax does not allow Loss under the head Capital Gains to be set off against any income from other heads u2023 this can be only set off within the u2018Capital Gainsu2023 head. Our article Capital Loss on Sale of House discusses it in detail.Long-Term Capital Loss can be set off only against Long Term Capital Gains.Short-Term Capital Losses are allowed to be set off against both Long-Term Gains and Short Term Gains.Carry Forward of Losses if return is filed before due date: If you are not able to set off your entire capital loss in the same year, both Short Term and Long Term loss can be carried forward for 8 Assessment Years immediately following the Assessment Year in which the loss was first computed. To keep a track of your losses, the Income Tax Department has laid out that Losses for a year cannot be carried forward unless that yearu2019s return has been filed before the due date. Even if itu2019s a loss return, you do not have any income to show u2023 do file your return before the due date.Example:I sold some property and know that the transaction will invite capital gains tax liability. My query is, when and how much should I pay as tax? Following are the details of the property:Bought in 2009-10 for Rs 20.50 lakh (including brokerage and stamp duty)Sold in June 2023 for Rs42 lakh with Rs 85,000 as brokerage.How much would be the tax liability?If I want to purchase capital gains bonds, when should I do so? How much time do I have to buy them so that I can avoid paying fines and charges, as well as legal and tax-related issues later on?The gain arising from transfer of property attracts capital gains tax. Since you have held this property for more than 24 months, the resultant gain is taxable at the rate of 20.60% (plus applicable surcharge) as a long-term capital gain (LTCG).The tax liability will be calculated as follows:Step 1: Calculating the cost of acquisition (Rs20.5 lakh).Step 2: Calculating the indexed cost of acquisition, which is the cost of acquisition * cost inflation index (CII) in the year of sale / CII in the year of acquisition (Rs20.5 lakh *272/148 = Rs37,67,568).Step 3: Calculating the LTCG [Rs41,15,000 (net of brokerage expenses)u2023 Rs37,67,568 = Rs3,47,432)].Step 4: Calculating the tax on LTCG with cess (Rs3,47,432 * 20.60% = Rs71,571).Step 5: Applying applicable surcharge depending on your total income for FY2017-18.Long Term Capital Tax to be paid is Rs 71,571The resultant LTCG could be claimed exempt from tax if the gain is re-invested in a specified manner. One such reinvestment that qualifies for the exemption is the purchase of government-notified bonds (to the extent of the LTCG) within 6 months from the sale of the property). You need to buy Capital Bonds worth the Long-term capital Gain ie 3,47,432.The other alternative available for claiming exemption from long-term gains tax is by re-investing the sale proceeds in another property within prescribed timelines. If such reinvestment is not made, the LTCG or part thereof would be taxable.

Sale of a property results in capital gains. Before we explain how you can save tax on gains, the first step is to understand how gains are calculated. Remember that gains can be short term or long term depending upon the period of time for which this asset was held by you.House property is a short term capital asset when held for 36 months or less. If held for more than 36 months it is considered a long term capital asset.Calculate your Capital GainsTo arrive at the Short Term Capital Gains (STCG) u2023 From the total Sale Price of the asset deduct cost of acquisition, expenses directly to sale, cost of improvements(if any) u2023 the resulting amount is the Short Term Capital Gain.In case you have held the asset for more than 3 years, you would have earned Long Term Capital Gains(LTCG). For calculating LTCG, you are allowed to deduct Indexed Cost of Acquisition/Indexed Cost of Improvements from the sale price. Indexation is done by applying CII (cost inflation index). This increases your cost base (and lowers your gains) since the purchase price is adjusted for the impact of inflation.What are the Tax RatesSTCG are taxed at applicable tax rates basis your slab. LTCG are taxed at 20%Claiming exemption from LTCGSale of a capital asset can result in substantial gains. You can avoid paying tax on these capital gains by claiming exemption through the following ways. (Remember that you must declare your entire gains in your return and mention exemption claimed by you as well).By Purchasing Another Property u2023 The Income tax act allows you to reduce your capital gains to the extent these have been invested in purchasing a new house property. Please note u2023 you do not have to invest the entire sale receipt, but the amount of capital gains. Of course, your purchase price of the new property may be higher than the amount of capital gains, however your exemption shall be limited to the total capital gain on sale. Also, you can purchase this property either one year before the sale or 2 years after the sale of your property. You are also allowed to invest the gains in the construction of a property, but construction must be completed within 3 years from the date of sale. In the Budget for 2014-15, it has been clarified that only ONE house property can be purchased or constructed from the capital gains to claim this exemption. Do remember that this exemption can be taken back if you sell this new property within 3 years of its purchase.By Investing in Capital Gains Account Scheme u2013Finding a suitable seller, arranging the requisite funds and getting the paperwork in place for a new property is one time consuming process. Fortunately, the Income Tax agrees with these limitations. If you have not been able to invest your capital gains until the date of filing of return (usually 31st July) of the financial year in which you have sold your property, you are allowed to deposit your gains in a PSU bank or other banks as per the Capital Gains Account Scheme, 1988. And in your return claim this as an exemption from your capital gains, you donu2019t have to pay tax on it. However, you must invest this money you have deposited within the period specified by the bank, if you fail to do so, your deposit shall be treated as capital gains.Purchasing Capital Gains Bonds u2023 What happens if you do not intend to purchase another property, there is no use of investing the amount in a Capital Gains Account Scheme. In such a case, you can still save the tax on your capital gains, buy investing them in certain bonds. Bonds issued by the National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC) have been specified for this purpose. These are redeemable after 3 years and must not be sold before the lapse of 3 years from the date of sale of the house property. Note that you cannot claim this investment under any other deduction. You are allowed a period of 6 months to invest in these bonds u2023 though to be able to claim this exemption, you will have to invest before the return filing date. The Budget for 2023 has specified that you are allowed to invest a maximum of Rs 50lakhs in a financial year in these bonds.This explanation has been provided assuming you have sold a house property. Tax rules are a bit different when you sell land. Read about them here How to save Capital Gains Tax on Sale of Land - ClearTax Blog

A2AAs you are aware short term capital gain in India, the holding period of the property from Financial Year 2017u201318 is less than 2 years of registry or OC whichever is later (where as till 2016u20132017, it was 3 years). Please remember that cost inflation index can not be applied in short term capital gain.There are provisions to adjust the sale consideration (the price for which you sold the property)i) by deducting any brokerage, commission you had paid at the time of property sale.ii) improvements, if any, incurred during the period you owned the assetiii) Assessees can get an exemption by investing long term capital gains from the sale of house property in up to two house properties against the earlier provision of investment in one house property with same conditions. However, the capital gains on the sale of house property must not exceed Rs 2 crores. (Budget 2019)Please consult with a chartered account or Registered Valuer for more details

Ways to Save Tax on long term capital gain from real estate:-1] Buy or Construct a Residential Houseu00d8 Section 54: Exemption on Sale of House Property on Purchase of Another House Property.It is basically reinvesting in a property.Here, Old Asset : Real Estate Property, New Asset : Real Estate Property.Any long term capital gain arising from sale of residential house property shall be exempt to the extent such amount of gain is invested in-u00b7 Purchase of residential house during 1 year prior to or 2 years after the date of the transfer of property.u00b7 Construction of residential property within 3 years from the date of transfer.u00d8 Section 54F: Exemption on capital gains on sale of any asset other than a house property.Here, Old Asset: Any Real Estate Asset, New Asset : Real Estate PropertySection 54F states that any gain realizing from the sale of any long-term asset (apart from real estate property) shall be fully exempt if the entire net sales is invested in purchasing of 1 residential house within 2 years or before 1 year from the date of such transfer OR the net consideration is invested in construction of 1 residential within 3 years after the date of such transfer.2] Capital Gain BondsSection 54EC: Exemption on Sale of House Property on Reinvesting in specific bonds.Section 54EC provides for exemption on capital gains tax, if the amount is invested in the bonds of Rural Electrification Corporation (REC) or the National Highways Authority of India (NHAI). The investment must be made within six months of sale of the property. One can invest up to Rs 50 Lakhs in these bonds, which have a tenure of three years.3] Capital Gains Account SchemeThis is like a temporary way to save on capital gains.In case, the new property could not be acquired/constructed before the due date of filing of return for that year, the amount sought to be invested can be deposited in Capital Gains Account with any authorised bank. Generally, most of the public sector banks are authorised under the Capital Gains Account Scheme.Note that the amount so deposited shall be eligible for exemption as if it has been utilised for purchase/construction of new residential house property, however, if any amount so deposited, remains un-utilised at the end of 3 years from the date of transfer, it shall be chargeable to tax in that year.You can have a look at a video posted by YADNYA INVESTMENT ACADEMY on Youtube. For a better understanding about the rules, conditions and features of the tax saving methods mentioned above.Some very important points regarding other aspects of saving capital gains tax have been mentioned in the video.