FAQ Capital Gain

Q- How to Compute Capital Gains On Inherited Property?
Computation of Capital Gains on inherited property. My husband purchased a site from the development authority in the year 1970 and constructed a house thereon. We have been living in the house since then. My husband expired in Jan 2008 and the property devolved on me(his wife) in terms of his will. I have disposed off the property in May 2006. I request you to please advice me about the computation of capital gains. I) Would I get the benefit of indexation from 01/04/1981 or from Jan 2008.
You will be happy to note that in case like yours, where the capital asset becomes somebody else property on account of death, the treatment under I T Act is same as would have been applicable in case original owner, had he lived at the time of sale. Section 49(1) of the I T Act makes it amply clear. You become the owner of the property by mode specified in section 49(1), hence as per section 55(2)(b)(ii) ,cost to your husband shall be cost of the property. Therefore, I have not even iota of doubt that the capital gain on sale of property, although taxed in your hand, has to be computed by indexation from year 1981 in your case as the asset was purchased in 1970 by your husband.

Important Beneficial Point
As can be seen from definition of cost of acquisition in case of mode of acquisition given in section 49(1) , the cost of acquisition means
cost of the capital asset to the previous owner
OR
fair market value of the asset on the 1st day of April, 1981
at the OPTION of the assessee.

So, you get in contact with a valuer registered with income tax department and obtain a valuation report from him for fair market value as on 1/4/1981. You can then compute indexation on that fair market value from year 1981 till the year of sale. You should understand this by simple example that if the cost of acquisition by your husband was 100 in 1970 and after getting the valuation report, registered valuer values the market rate of the asset as on 1/4/1981 at Rs 200, you can apply the indexation on Rs 200 because on account of section 55, you have option to substitute that value as cost of acquisition. This is your RIGHT and can substantially reduce the tax liability.

Note of Caution regarding the sale value
Remember, if the sale value of the property is less than the value taken for computation of stamp duty for registering conveyance document, the A.O shall adopt that value as deemed sales consideration. This as per section 50C of the I T Act.
Therefore, all things must be in consideration while computing the capital gains on sale of land or building or both.

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