- 18-Apr-2025
- Education Law
When property is gifted in India, there are no immediate tax implications at the time of the gift. However, if the recipient decides to sell the gifted property, capital gains tax becomes applicable. The tax treatment depends on whether the property is sold within 2 years (short-term) or after 2 years (long-term). The key factors that affect the capital gains tax on a gifted property are the cost of acquisition and the holding period of the donor.
When a property is gifted, the cost of acquisition for the recipient is the same as the cost at which the donor acquired it.
This means that the recipient does not get the fair market value of the property at the time of the gift, but instead inherits the donor’s original purchase price (including any improvements made by the donor).
Similarly, the holding period of the property for the recipient is treated as the holding period of the donor.
If the donor purchased the property for ₹50,00,000 and held it for 10 years, the recipient's cost of acquisition will also be ₹50,00,000, and the holding period will be considered as 10 years (not from the date the gift is received).
If the gifted property is sold within 2 years of receipt, the capital gains tax will be treated as short-term and taxed at a higher rate.
If the gifted property is held for more than 2 years before being sold, the capital gains will be treated as long-term. The tax rate for long-term gains is generally lower, and certain exemptions may apply (such as under Section 54 if the proceeds are reinvested in another residential property).
The capital gains tax on gifted property is calculated using the following formula:
Capital Gains = Sale Price - Cost of Acquisition - Cost of Improvement - Exemptions (if any)
Sale Price: The amount at which the property is sold.
Cost of Acquisition: The price at which the donor acquired the property (which becomes the recipient's cost).
Cost of Improvement: If any improvements were made to the property by the donor or the recipient, those costs can be added to the cost of acquisition.
Exemptions: If the recipient qualifies for any exemptions (e.g., under Section 54, if the property is a residential property and the proceeds are reinvested into another residential property), they can reduce their taxable capital gains.
For property held for less than 2 years, the STCG tax rate is 20% (for assets like land, house, and real estate) after applying indexation benefits (if available).
For property held for more than 2 years, the LTCG tax rate is 20% with indexation benefits. Indexation helps adjust the cost of acquisition to account for inflation, reducing the taxable capital gains.
Note: For residential property, there are special exemptions under Section 54, allowing the exemption of long-term capital gains if the proceeds are invested in another residential property.
Indexation adjusts the cost of acquisition and cost of improvements to account for inflation over the years, which can significantly reduce the capital gains tax liability.
The indexation is based on the Cost Inflation Index (CII) published by the Income Tax Department.
The formula for indexation is as follows:
Indexed Cost of Acquisition = Cost of Acquisition × (CII of the year of sale / CII of the year of acquisition)
This helps in increasing the cost of acquisition, thus reducing the capital gains.
A father gifts a plot of land to his son. The father’s original cost of acquisition was ₹20,00,000, and he had held it for 10 years. The sale price after 10 years is ₹40,00,000.
Cost of Acquisition for the son = ₹20,00,000 (the same as the father’s original cost).
The capital gain = ₹40,00,000 (sale price) - ₹20,00,000 (cost of acquisition) = ₹20,00,000.
Since the property was held for more than 2 years, the capital gain is long-term.
Indexed Cost of Acquisition: If the CII for the year of sale is 350 and for the year of acquisition is 200, the indexed cost will be:
Indexed Cost of Acquisition = ₹20,00,000 × (350 / 200) = ₹35,00,000
Capital Gain = ₹40,00,000 (sale price) - ₹35,00,000 (indexed cost of acquisition) = ₹5,00,000.
LTCG Tax: 20% of ₹5,00,000 = ₹1,00,000.
A mother gifts her apartment to her daughter. The mother bought the apartment 5 years ago for ₹30,00,000, and the daughter sells it for ₹60,00,000 after 1 year.
Cost of Acquisition for the daughter = ₹30,00,000.
Capital Gain = ₹60,00,000 (sale price) - ₹30,00,000 (cost of acquisition) = ₹30,00,000.
Since the property was held for less than 2 years, the capital gain is short-term.
STCG Tax: 20% of ₹30,00,000 = ₹6,00,000.
The capital gains tax on gifted property in India depends on the holding period and the cost of acquisition. If the property is sold after 2 years, the long-term capital gains tax is applicable, with indexation benefits. If sold within 2 years, short-term capital gains tax applies. The cost of acquisition for the recipient is the same as that of the donor, and the holding period of the donor is considered the recipient’s holding period for capital gains tax purposes. It is important to account for indexation to reduce taxable capital gains and ensure proper tax reporting when selling gifted property.
Answer By Law4u Team
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