Capital Gain Tax on Sale of Inherited property
Query 1]
If I sell my inherited house property, will I be liable to pay the tax on that? I have inherited a house property in Gwalior which is in very bad condition and will be demolished. After that the land is to be sold. With this money, I will purchase two plots in Durg (Chhattisgarh State). Will I be liable for LTCG Tax? Sale and purchase will be completed in the FY 2023 24. [nchawda66@gmail.com]
Opinion:
- Inherited or self acquired, the sale of the property attracts Capital Gain Tax.
- The tax treatment and implication would be different if you sell the house vis a vis sale of the plot after demolition of the house property.
- Sale of Plot i.e., Sale after demolition of the house property:
a) Long Term Capital Gain (LTCG) arising from sale of your inherited property cannot be saved by merely purchasing the plot or plots. However, if you construct the house property within a prescribed period then you would be eligible for capital gain exemption on the entire amount of investment including the cost of the plot.
b) If both the plots are in different areas or are not attached or adjacent to each other then only deduction towards one plot would be added to the construction cost for working out capital gain exemption.
c) The prescribed time frame for capital gain exemption is as under:
i] For purchase:
One year before or two years after the date of sale or transfer.
ii] For Constructions:
Three years from the date of sale or transfer.
In your case, since you are not purchasing but may construct the house property, you have to complete the construction within a period of 3 years.
d) Capital gain exemption in this case is admissible under section 54F and for exemption you are required to invest the entire amount of net sale consideration in construction (or purchase if readymade house property is sought to be purchased) in “one” house property.
4. Sale of the house property i.e., sale before demolition:
a) In this case also, mere purchase of the plot or plots may not enable you to claim exemption from LTCG arising from sale of your inherited property. If you construct the house property within a prescribed period as discussed above then you would be eligible for capital gain exemption on the entire amount of investment including the cost of the plot.
b) If you transfer the house property i.e., transfer without demolition then capital gain exemption would be admissible under section 54 and for exemption you are required to invest the amount of LTCG only (and not entire sale consideration) in construction (or purchase if readymade house property is sought to be purchased) in “one” house property.
c) The benefit can be extended to 2 house properties if the amount of LTCG is not exceeding Rs. 2 Cr. In short, if LTCG is not exceeding Rs. 2 Cr then you can purchase two plots and construct two separate house properties and both would be eligible for capital gain exemption.
5. Readers may further refer to the last week’s issue of The Tax Talk Dated 12.06.2023 wherein the issue of capital gain taxation under section 54 vis a vis section 54F has been discussed at length.
Query 2]
Dividend income is tax free or taxable? If taxable, whether any deduction under section 80L or other section is available against the dividend income? My minor son is a singer and regularly gets some income / prize on his performance. Do I need to add this income also in my ITR? My income is in the 30% tax slab. As a tax planning measure, if I transfer my bank FDR in the name of my wife, will I be able to save some tax? My wife will be having an interest income of Rs. 1.20 Lakh & don’t have any other income.
Opinion:
- Dividend income is now taxable in the hands of the recipient. No deduction like erstwhile section 80L is admissible against dividend income.
- Minor’s Income:
All the income minor is required to be clubbed with the income of the parents pursuant to Section 64(1A) of the Income Tax Act -1961. However, not all income is subject to the clubbing provision. It is not applicable in respect of income of the minor out of own manual work or out of talents or specialized knowledge & experience. Thus, if a minor, of say 15 years, has earned income from singing or development of an android app or from e-commerce, or from dancing etc. then the income is to be treated as his/her individual income. Whenever a minor child’s income is clubbed, exemption up to Rs 1,500/- for maximum of 2 children is available to the parents. Further, clubbing provision is not applicable for minors with disability (based on definition of disability in Section 80U).
- Transfer of Bank FDR in the name of Wife Vs. Clubbing Provision:
Where any asset is transferred by an individual to the spouse directly or indirectly, otherwise than for adequate consideration or in connection with an agreement to live apart, any income from such asset is deemed to be the income of the transferor. The idea is to control tax avoidance by spreading investment in the name of spouse. If you transfer the amount or FDR in the name of the wife then Income by way of Interest etc from such investment/FDR would not be treated as her income but would be clubbed with your income only.
[Readers may forward their feedback & queries at taxtalknew@gmail.com. Other articles & response to queries are available at www.theTAXtalk.com ]
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Regards,
CA Naresh Jakhotia
Partner – M/s. SSRPN & Co.
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