Owner Dies After Sale – Will New House Bought by Legal Heir Get Capital Gain Exemption?
[Query]
I had purchased a plot in my name on 15-03-2001 for ₹ 2,70,450. Thereafter, I constructed a residential house on the said plot during FY 2005-06, and the construction was completed in Dec – 2006 at a cost of ₹ 30 Lakh. Thus, the total cost of the property was ₹ 32,70,450/-. Later, I gifted this house property to my wife on 23-10-2020 through a registered gift deed and no consideration was received. My wife sold this property on 22-05-2025 for ₹ 1.48 Cr. At the time of sale, brokerage of ₹1,48,000 was paid by cheque, and TDS of ₹1,48,000 was deducted by the buyer. Unfortunately, my wife expired on 03-10-2025.
After the sale of the property, I purchased a residential flat in my own name on 01-02-2026 for ₹ 1.45 Cr out of the sale proceeds of the above property. In this connection, I seek your guidance on the following points:
1. Whether capital gain exemption will be available in this case, as the new flat has been purchased in my name though the original property was sold by my wife?
2. If exemption is not available, how will the capital gain be taxed?
Whether tax should be paid at 20% with indexation or at 12% without indexation, and which option will be more beneficial?
3. If capital gain tax is payable, what is the due date for payment of tax – whether it should be paid before 31-03-2026 or before the due date of filing the return?
4. My wife had the following other income during FY 2025-26:
(a) Interest on FD – ₹6,94,293 (TDS ₹73,726)
(b) Dividend on shares – ₹8,182
(c) Capital gain on sale of shares and mutual funds after death – ₹1,12,000/-.
5. Whether rebate / exemption up to ₹12 lakh (tax of ₹60,000) will be available in this case? I shall be grateful if you kindly guide me on the above issues. [empe********@gmail.com]
Opinion:
This query shows how real-life situations do not always follow the neat structure of the Income-tax Act. The real issue is whether exemption under section 54 can be claimed when the property is sold by one person and reinvestment in another house property is made later by the legal heir after death.
When a property is received by gift, the cost and holding period of the previous owner are considered. Accordingly, the husband’s cost will be taken and the gain will be Long-Term Capital Gain (LTCG). This position is well settled.
The real controversy begins while claiming exemption under section 54. A strict interpretation of the section may suggest that exemption is available only if the same assessee who earns the capital gain purchases the new residential house. In the present case, the capital gain arose in the hands of the wife, whereas the new house has been purchased later by the husband after her death. On literal reading, the taxmen argue that exemption is not admissible because the investment is not made by the same person.
However, Courts have repeatedly held that section 54 is a beneficial provision and should be interpreted liberally. In CIT vs. C.V. Ramanathan (125 ITR 191) (Madras HC) it was held that the legal representative steps into the shoes of the deceased assessee and exemption cannot be denied merely because reinvestment was completed after death. Similar view was taken in Late Mir Gulam Ali Khan vs. CIT (1987) 165 ITR 228 (AP) where the High Court held that the word “assessee” should be interpreted liberally and exemption cannot be denied merely because the reinvestment was completed by the legal representative after the death of the assessee. Courts have even allowed exemption in several cases where the new house was purchased in the name of spouse or jointly, holding that the object of the section is investment in a residential house and not necessarily in the name in which it is earned. The consistent principle emerging from these rulings is that substance of investment is more important than technical form. Applying these principles to the present case, a legally sustainable view is that exemption can still be claimed in the return of the deceased wife, to be filed by the legal heir, since the reinvestment has been made within the prescribed time out of the sale consideration.
The department may object on strict interpretation, but in view of judicial precedents, the claim is legally arguable. In tax matters, the difference between “not allowable” and “allowed after appeal” often depends on how far the taxpayer is willing to pursue the matter.
If for any reason exemption is not accepted, the gain will be taxable as LTCG. In such a case, the LTCG tax with indexation works out to around ₹8.30 lakh, whereas without indexation the tax will be around ₹14.80 lakh. In short, the LTCG tax would be around ₹ 8.30 Lakh if exemption under section 54 is not claimed or not allowed.
As regards the due date of payment, capital gain is taxable in the year in which the property is sold, and therefore advance tax provisions normally apply. The tax should ideally be paid before 31st March of the relevant financial year. If it is paid later but before filing the return, it will still be valid, but interest under sections 234B and 234C may become payable.
In respect of rebate under section 87A, the income up to the date of death will be taxable in the return of the deceased to be filed by the legal heir. Rebate is available only if the total income, after excluding incomes taxable at a special rate such as LTCG, falls within the prescribed limit of ₹12 lakh under the applicable provisions. LTCG on immovable property is taxed at special rate and is not eligible for rebate. Therefore, even if normal income is below ₹ 12 lakh, rebate may not be available in respect of tax arising from LTCG Income.
This case shows that property transactions within the family are easy to execute but sometimes difficult to explain under the Income-tax Act. Fortunately, courts have often preferred practical interpretation over rigid technicality, and relief may still be possible if the claim is made correctly and pursued with proper legal support.
[Views expressed are the personal views of the author. Readers are advised to seek professional advice before taking any decisions. Readers may forward their feedback & queries at nareshjakhotia@gmail.com. Other articles & responses to queries are available at www.theTAXtalk.com]
