My two daughters jointly purchased a residential plot in August 2007 within an established housing complex in Rajasthan. I entered into an agreement with my daughters in July 2012 and took possession of the plot to construct a residential house at my own expense. It is also agreed that I will retain any rental income earned and pay taxes as applicable. The construction was completed in July 2013 and the building was put on rent in the same month, duly entering into a lease agreement with the tenant.
I gifted the residential built up property to my daughters in August 2021 through an aptly worded gift deed duly notarized.
The sale deed was executed and registered in September 2022 with the local authority, Sub-Registrar Neemrana. However, as per the joint agreement of July 2012, I will continue to earn rental income till the sale of the entire property.
My daughters have now proposed to sell the property before 31st March 2023. How will the LTCG on the plot from the date of his purchase i.e. August 2007 and the LTCG of the residential house constructed later i.e. July 2013 be calculated, when the total asset is sold?
Will the LTCG and tax benefit under section 54EC be divided equally among the joint owners taking into account the prime construction cost of the residential house including stamp duty, brokerage and other related expenses?
Name withheld on request
Since, the terms of the agreement or gift deed are not available, it is not clear whether you had the ownership title of the residential house constructed by you or only the right to use/rent the residential house, which was subsequently gifted by you went. In August 2021, in equal proportion to you daughters.
Since the asset (plot of land and constructed residential house) was held for a period of more than 24 months before the sale, the entire asset would qualify as long-term capital asset (LTCA) and the income arising from its sale would be treated as long term capital gain (LTCG).
The cost of such property in the hands of your daughters would be the cost of the plot augmented by the cost of construction done by you and the stamp duty and brokerage charges incurred for registration of the property. Also, while computing LTCG, your daughters are eligible for the benefit of indexation in respect of the cost of the property (wherein the cost of the plot will be indexed from 2007 while the cost of construction/other charges will be indexed for the relevant year of payment).
Also, the LTCG will be divided in proportion to the investment made by the daughters at the time of purchase.
Further, the deduction available (including under section 54EC), as applicable, will be available to both the daughters in proportion to the specified investment made by them individually against their respective shares of LTCG income.
Parijad Sirwala is Partner and Head, Global Mobility Services, Tax, KPMG in India.
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