Tax on Sale of Property Received as Gift

Receiving a property as a gift and subsequently selling that property are two separate events for Income Tax purposes. The tax treatment depends on who gifted the property, whether tax was applicable when the gift was received, the original acquisition cost of the property and the period for which the property was held.

K M Gatecha & Co LLP provides advisory and capital gains computation services in Ahmedabad for sale of residential houses, flats, land and other immovable properties received through gift, inheritance or family transfer.

Is Property Received as a Gift Taxable?

A property received as a gift from a specified relative is generally not taxable in the hands of the recipient under the gift-tax provisions.

Specified relatives broadly include spouse, parents, children, siblings and certain specified lineal ascendants, descendants and related family members.

Property received under a will or by inheritance is also generally outside the taxation provisions applicable to gifts. However, where immovable property is received without consideration from a person who does not fall within the prescribed exemption, the stamp duty value may become taxable under the applicable provisions if the prescribed monetary conditions are satisfied.

What Happens When Gifted Property Is Sold?

When property received through a qualifying gift is subsequently sold, the sale can give rise to Capital Gains Tax.

In the case of property acquired through gift, will, succession or inheritance, the cost of acquisition is generally taken as the cost at which the previous owner acquired the property rather than the property’s market value on the date of gift.

The basic computation is:

Sale Consideration
Less: Eligible transfer expenses
Less: Cost of acquisition
Less: Eligible cost of improvement
= Capital Gain

The exact computation depends on the acquisition history, dates, residential status of the seller and applicable capital gains provisions.

Example – Property Received as Gift from Father

Suppose a father purchased a residential property for ₹20 lakh and subsequently gifted it to his son.

The son later sells the property for ₹80 lakh.

For capital gains purposes, the son’s cost will generally not be the market value on the date on which he received the gift. The father’s eligible original cost of acquisition is generally carried forward to the son for computing capital gains.

Accordingly, subject to applicable adjustments and deductions:

Sale Price: ₹80 lakh
Less: Eligible cost derived from previous owner: ₹20 lakh
Less: Eligible improvement and transfer expenses
Balance: Capital Gain before applicable exemptions

The actual tax payable will depend upon whether the gain is short-term or long-term and whether any exemption is claimed.

How Is the Holding Period Calculated for Gifted Property?

For determining whether a gifted property is a short-term or long-term capital asset, the period for which the previous owner held the property is generally included in the recipient’s holding period.

Therefore, merely selling a property shortly after receiving it as a gift does not automatically make the resulting gain short-term.

For example, if a father held a property for 10 years and gifted it to his daughter, who sold it one year later, the father’s holding period is also relevant while determining the character of the capital gain.

Long-Term Capital Gains Tax on Gifted Property

For transfers of long-term capital assets on or after 23 July 2024, the general LTCG tax rate is 12.5% without indexation, subject to applicable surcharge and cess.

For qualifying land or buildings acquired before 23 July 2024, a special grandfathering protection is available to resident Individuals and HUFs whereby tax under the new 12.5% without-indexation mechanism is compared with tax under the earlier 20% with-indexation mechanism, with protection against the higher liability as prescribed.

In gifted-property cases, the acquisition history of the previous owner therefore becomes especially important.

Property Acquired Before 1 April 2001

Where the previous owner acquired the property before 1 April 2001, special cost-of-acquisition provisions may become relevant. Subject to the applicable conditions, the fair market value as on 1 April 2001 may be relevant for determining the permitted cost base.

A proper valuation and review of the historical title documents can materially affect the capital gains computation.

Stamp Duty Value and Section 50C

Capital gains on sale of land or building cannot always be calculated solely on the sale consideration mentioned in the agreement.

If the stamp duty value of the property exceeds the actual consideration beyond the prescribed tolerance, Section 50C may require the stamp duty value to be considered as the deemed sale consideration for capital gains purposes. The current ITR framework reflects the 110% tolerance mechanism.

Accordingly, both the actual sale consideration and the applicable stamp duty valuation should be checked before finalising the tax computation.

Capital Gains Exemption on Sale of Gifted Property

Depending upon the nature of the asset, taxpayer and reinvestment, capital gains exemptions may be available under provisions such as:

• Section 54 – reinvestment of eligible long-term capital gains from a residential house into another residential house, subject to conditions.
• Section 54F – specified reinvestment where the original long-term capital asset is not a residential house, subject to conditions.
• Section 54EC – investment of eligible long-term capital gains in specified bonds, subject to statutory conditions and limits.

Eligibility should be verified before executing the reinvestment because statutory timelines and conditions apply.

Documents Required for Capital Gain Calculation on Gifted Property

For an accurate computation, the following documents are generally relevant:

Gift Deed or inheritance documents, previous owner’s original purchase deed, date and cost of original acquisition, property improvement documents, valuation report where applicable, sale deed or proposed sale agreement, stamp duty or Jantri value, brokerage and transfer expenses, PAN and residential status of the seller, and details of any proposed reinvestment for claiming capital gains exemption.

Capital Gains Tax Advisory for Gifted Property in Ahmedabad

K M Gatecha & Co LLP assists taxpayers in Ambli, Ahmedabad with capital gains calculation and Income Tax compliance relating to property received through gift, will or inheritance.

Our services include review of the Gift Deed and ownership history, determination of previous owner’s cost, calculation of holding period, consideration of 1 April 2001 valuation where applicable, comparison of eligible capital gains tax methods, Section 50C analysis, capital gains exemption planning, advance tax computation and reporting of the property transaction in the Income Tax Return.

Proper tax computation should ideally be completed before the property is sold so that the seller can evaluate the tax liability and available reinvestment options in advance.