My grandfather constructed a building in 1989, where all his sons i.e. my father and uncles got flats. Thereafter a flat in the building was given from my grandfather to my father on the death of my grandfather in 1990 and then from my father to my mother in 1998 and on his death in 2003 to my brother and me. We have now sold the flat. Will the entire sale proceeds received by us be taxed as we have not incurred any cost?
Answer: For computing capital gains, the determination of cost of acquisition is very important. So before answering your question, let us first understand how the cost of acquisition is determined for the purpose of taxation of capital gains under the tax laws in the case of property which has not been purchased by you, but has been acquired by you or Whether received as an inheritance or as a gift. An inheritance can be either under a will or under personal law if the person has died without a valid will. In such cases the cost of acquisition in the hands of the present owner is not zero but the cost of the previous owner who paid for it. Further, the holding period in such cases should be taken from the date of acquisition of the previous owner who made the payment to determine whether it is a short-term asset or a long-term asset.
Since your grandfather had borne the cost of construction of the building, the cost of the flat that you and your brother will inherit will be a proportionate share of your flat in the expenditure incurred by your grandfather for the construction of the building, initially. Since the flats were constructed before 1st April 2001, you have the option to choose the fair market value of the flat as on 1st April 2001 as the cost of acquisition for computing the capital gain.
To find out the fair market value of the flat as on 1st April 2001, you can take stamp duty ready reckoner rates or get a valuation report from a registered valuer, but the fair market value as per the valuation report does not exceed the stamp duty rate It is possible The circle rate of the flat as on 1st April 2001. Since you would choose to replace your cost of acquisition by the fair market value as of April 1, 2001, you would be required to pay tax on long-term capital gains at a flat rate of 20%. The difference between the fair market value of the flat and the indexed cost in the year of sale.
There are differences of opinion as to whether the indexation benefit will be available from the date the original holder acquired it or the date the seller acquired it. The law provides for indexation from the date on which the seller got the owner of the property, but some tax tribunals have held that indexation should be allowed from the date when the original holder acquired it or from 1 April 2001 as appropriate. In terms of market value, April 1, 2001 has been selected.
In addition, if the total holding period of all previous owners exceeds two years, the capital gain will be the long-term capital gain.
Balwant Jain is a tax and investment specialist and can be contacted on Twitter at jainbalwant@gmail.com and @jainbalwant.