10/11/2018 Capital Gains on Sale of Gifted Assets - Provision & Implications

Capital Gains on Sale of Gifted Assets –

Provision & Implications
Updated on Sep 04, 2018 - 03:34:31 PM

The primary purpose of any investment or asset acquisition is to earn money above the
capital. Interest on a fixed deposit, mutual fund returns, dividends, profit from sales –
they all are capital gains. In short, capital gains serve as the incentive to investors.

Capital asset includes land, house property, shares, gold, deposits etc. Further, one
may determine his gains by reducing the purchase price from the sale price. However,
what if you end up selling a piece of land that you have inherited or received as a gift
from parents or ancestors? This can also give rise to capital gains based on how you
invest or capitalize the asset? How will income tax apply and be computed in this
scenario? Let us understand these a little more in detail now.

1. General provision for capital gains computation

2. Capital gains on sale of inherited or gifted assets
Capital gains or not?
Determining Cost of acquisition
Determining period of holding

1. General provision for capital gains

computation
As mentioned above, sale of a capital asset held by you, will result in capital gains. Such gains
could be short-term gains or long-term gains, depending on the duration for which you have held
the asset. The duration for treating an asset to be short term or long term differs from asset to
asset.

For instance, a house property held for less than 2 years is short-term whereas if held for more
than 2 years would be considered long-term. However, for listed equity shares, the short-term
duration is less than 12 months and long-term duration is more than 12 months.

Further, gains from short-term assets are determined by using the simple formula of:

Sale Consideration – Cost of acquisition (Purchase Price) – Cost of improvement

Whereas, gains from sale of long term assets are determined using the below formula:
https://cleartax.in/s/capital-gains-gifted-assets/ 1/2
10/11/2018 Capital Gains on Sale of Gifted Assets - Provision & Implications

Sale Consideration – Indexed Cost of Acquisition – Indexed Cost of Improvement

You may see that for long term assets, law provides taxpayers the benefit of indexation, which
would help factor in the impact of inflation in price over a period of time.

2. Capital gains on sale of inherited or gifted

assets
While the provisions discussed above would apply to assets that have been purchased by the
taxpayer, we also need to understand the tax implications when inherited or gifted assets are
subsequently sold by the taxpayer.

Capital gains or not?

First and foremost we need to understand if such sale gives rise to capital gains. The answer is
yes. Any income that arises from sale of a capital asset, irrespective of whether the asset was
initially purchased or inherited, would be considered as capital gains.

Determining Cost of acquisition

Moving on to the computation mechanism, when an asset is gifted or inherited, the taxpayer does
not have a purchase price that he can attribute to the asset. To address this, law itself has
discussed certain scenarios. This includes a case of gift or inheritance, where the purchase price
of the previous owner would be treated as the purchase price for computing capital gains of the
taxpayer.

Eg. Rahul’s father has gifted him a flat in the June 2017. His father had purchased the flat in 2012
for Rs 40 lakhs. Rahul proposes to sell this flat in September 2018 for a consideration of Rs 50
lakhs. Therefore, Rahul would compute his capital gains from sale of this flat by considering
purchase price of his father which is Rs 40 lakhs.

Determining period of holding

Interestingly, while law has discussed how purchase price must be determined in such scenarios, it
is silent about what should be considered as the holding period of the asset to determine if the
asset is long term or short term.

In this regard, many courts and tax tax tribunals have held that for gifted or inherited property, the
period of holding should be considered from the time the previous owner acquired it.

Therefore, if we have to apply this provision to the example discussed above, the period of holding
of the property for the taxpayer, would begin from the year 2012 itself (year of purchase by father)
and accordingly, he can avail himself of the benefit of indexation too.

https://cleartax.in/s/capital-gains-gifted-assets/ 2/2