Capital gain on ancestral property
M.A.Khan
(Querist) 05 June 2014
This query is : Resolved
Dear sir
My wife got share in his father's property. This property was owned by my wife grand father since 1950. Now my wife decided to sell that property. Now what tax she has to pay. Is any capital gain will be charged on it?
Other question is long term capital gain tax will be charged @10% if no indexation cost is less from the selling cost of property is it true? And if so then actual property buying cost will be deducted or not please advise us ASAP
T. Kalaiselvan, Advocate 
(Expert) 06 June 2014
If an individual or HUF having LTCG from transfer of a residential house makes investment to purchase or construct a residential house, the amount invested in the new residential house is allowed as a deduction from the LTCG. The new residential house can be constructed within 3 years from the date of transfer or can be purchased one year before or two years after the date of transfer.
To claim this deduction, the assessee, after taking into consideration the amount that he has already invested for construction or purchase of the new residential house upto the due date of filing of return of income in his case, should deposit the remaining amount which he intends to use for purchasing or constructing the new residential house in a Capital Gains Deposit Account on or before the due date for filing of the return and enclose proof of investment in construction or purchase and proof of making deposit into the capital gains deposit account along with the return of income. Based on this he would be allowed the deduction from the LTCG for that assessment year. The amount which is deposited in the Capital Gains Deposit Account has to be utilised by him for the purpose of purchase/ construction of the new residential house within two/three years from the date of transfer, respectively.
In case he fails to utilise this amount either wholly or partly for the above purpose within this period the amount remaining unutilised would be taxed as Capital Gains in the year in which the above mentioned period of three years is over.
The cost of the new residential unit purchased/constructed would be reduced by the deduction allowed from LTCG for a period of 3 years from its date of purchase/construction.
Anirudh
(Expert) 07 June 2014
1. It is not correct to say that only 10% is payable as Long Term Capital Gains Tax in case the benefit of indexation of cost of acquisition is not availed in respect of Capital asset like land/building property. That provision is available only in respect of listed securities and Zero coupon bonds. [pl see proviso to Section 112)
2. Now coming to the main question of capital gain on the property which your wife received from her father. The cost of acquisition of the property in this case would be deemed to be the cost for which the previous owner of the property acquired it (in your wife's case the cost to her grand father, in case the grand father had acquired it, or to his father in other words, whoever first acquired it by paying cost, instead of inheriting it). See. Section 49(1)(iii)(a)
After knowing the cost, the fair market value as on 1.4.1981 has to be arrived.
After arrival of fair market value of the property as on 1.4.1981, the index has to be applied for each year till the year in which the sale has to take place. THIS WILL BE THE INDEXED COST OF ACQUISITION OF THE PROPERTY.
From the sale proceeds, if the indexed cost of acquisition is deducted, then you will get the Long Term Capital Gain. On that LTCG 20% tax is payable. This tax can be avoided by adopting any of the exemption methods available to the assessee.
