Capital Gains on Sale of Gifted Assets – Rules and Impact

The main goal of acquiring an asset or making an investment is to earn returns, which are referred to as capital gains. These gains may come from interest on fixed deposits, mutual fund earnings, dividends, or the sale or transfer of assets. In essence, capital gains act as a reward for investors.

Gifts received from relatives are not taxable in India. However, what happens if you sell a gift received from parents or ancestors? If such a gifted asset, like land, property, jewellery, or any other capital asset, is sold, it results in capital gains. Here’s a detailed explanation of the tax implications of capital gains arising from the sale of gifted assets.

---

Capital Gains on Sale of Inherited or Gifted Assets

Under the Income Tax Act, 1961, a gift received from a relative is fully exempt from tax. But if the recipient later sells or transfers the gifted item, tax is applicable at the time of sale. When the transferred item is a capital asset, capital gains tax will apply.

In simple terms, when an inherited or gifted capital asset is later sold by the recipient, it generates capital gains. The taxpayer must then pay short-term or long-term capital gains tax based on the profit earned from the sale.

---

How Capital Gains Are Calculated on Sale of Gifted Assets

Capital gains from selling an asset can be classified as short-term or long-term, depending on how long the asset was held. The holding period varies for different types of assets, as shown below:

Asset Type	Short-Term Capital Asset	Long-Term Capital Asset
Listed securities, units of UTI, equity-oriented mutual fund units, zero-coupon bonds	Held for ≤ 12 months	Held for > 12 months
Other assets	Held for ≤ 24 months	Held for > 24 months

Gains from the sale of short-term assets are calculated using the formula:

Sale Value – Transfer Expenses – Cost of Acquisition – Cost of Improvement

For long-term assets, the formula changes to:

Sale Value – Transfer Expenses – Cost of Acquisition – Cost of Improvement

Taxpayers can also choose to apply indexation for long-term assets but at a higher tax rate. In that case, the formula becomes:

Sale Value – Transfer Expenses – Indexed Cost of Acquisition – Indexed Cost of Improvement

Indexation adjusts the asset’s cost to account for inflation over time. This benefit, previously available for long-term capital assets, has been removed from FY 2024–25. However, due to public opposition, the Government has introduced an amendment for real estate transactions, giving taxpayers the choice to calculate capital gains tax at 12.5% without indexation or at 20% with indexation.

Determining the Cost of Acquisition

The cost of acquisition refers to the amount paid or the expenses incurred by the taxpayer to obtain the asset.

When it comes to gifted or inherited assets, the recipient cannot specify a direct purchase price since no payment was made. To resolve this, the tax law provides clarity by stating that in cases of inheritance or gift, the purchase price of the previous owner will be considered as the cost of acquisition for calculating capital gains. Additionally, any cost of improvement incurred by the previous owner will also be included. Therefore, the cost of purchase plus the cost of improvement together form the cost of acquisition.

Example 1:
Ajay received a flat as a gift from his father in June 2018. His father had bought the flat in 2010 for ₹40 lakh. If Ajay sells the flat in September 2025 for ₹50 lakh, he must use his father’s purchase cost of ₹40 lakh while calculating capital gains.

Example 2:
Rohit received a house property as a gift from her father in 2016 and sold it in February 2025. Her father had purchased the property in 2014 for ₹25 lakh and spent ₹5 lakh on improvements in 2015. For calculating long-term capital gains, Rohit must consider both the purchase cost and improvement cost, i.e. ₹25 lakh + ₹5 lakh. She can also claim indexation benefits.

---

Determining the Holding Period

Several court rulings and tax tribunals have confirmed that for gifted or inherited capital assets, the holding period should be counted from the date the previous owner acquired the asset. Based on this holding period, the asset will be classified as short-term or long-term.

Example 1:
Sarthak was gifted land by his father in June 2017. His father had purchased it in 2011 for ₹40 lakh. Sarthak sold the land in August 2025 for ₹80 lakh to Raunit. The holding period will be considered from 2011 (when his father purchased it). Therefore, it will be treated as a long-term capital asset, and Raunit will be liable to pay long-term capital gains tax. Since the asset was bought before 23rd July 2024, the benefit of indexation can be claimed.

Example 2:
Supriya received a flat from her mother in May 2017. Her mother had bought the flat in June 2016 for ₹40 lakh. Supriya sold it in December 2017. Since the flat was gifted, the cost of acquisition will be considered as ₹40 lakh, the original purchase cost paid by her mother. The holding period will start from June 2016. Because the sale took place within two years from that date, Supriya will have to pay short-term capital gains tax.

---

Final Word

Gifting or inheriting capital assets is a common practice. However, when the recipient decides to sell such assets, capital gains tax rules come into play and must be followed as per the tax regulations. This explanation provides a clear understanding of the taxation process applicable to such transfers.

Disclaimer: The content on this website is for informational purposes only and does not constitute legal, financial, or professional advice. Please consult qualified experts before acting on any information. K M GATECHA & CO LLP accepts no liability for errors, omissions, or outcomes from the use of this content. This site is not an advertisement or solicitation.