The father, a Christian, had donated his newly redeveloped apartment to his two daughters and his wife, each with a 1/3rd share, by executing a registered gift deed in April 2022. The completion certificate was received in April 2018. The wife expired in June 2024 without a will. Her share automatically went to all surviving relatives, namely her father (her husband) and two daughters, 1/3rd each under the provisions of the Indian Succession Act 1925. Immediately, in June/July 2024, he executed a registered release. deed for his inherited 1/3rd share in favor of both daughters equally. The father passed away in August 2024. Now the daughters want to sell this property. How should the capital gains be calculated? Can we assume a higher value for the fair market value in April 2018 than the stamp duty valuation?
Answer: Since the property in question was acquired by both daughters in successive transactions other than for valuable consideration, their cost will be the cost to the previous owner who had paid for it. Since the father had paid for it, his costs would be theirs.
Calculation of capital gains for daughters selling inherited real estate
This will apply to the 1/3rd share originally acquired through a deed of gift executed by their father, as well as to the 1/3rd of the 1/3rd share inherited from their mother, as well as to ½ of the 1/3rd share that was received from their father by a deed of release signed by him to determine its cost, as we will ultimately have to find out the cost of the person who had acquired it for consideration. The costs for the father are therefore considered to be the costs for the daughters.
The father is said to have applied for section 54 exemption for the redevelopment of the building in terms of section 45(5A), so for him the cost was the fair market value of the flat he acquired in April 2018, the date on which the completion certificate for the new redeveloped flat was issued. So you will need to know the fair market value of the apartment in April 2018.
The fair market value as of April 2018 will have to be determined based on that year’s stamp duty bill. In my opinion, a higher fair market value can be assumed than the stamp duty value on the date of delivery, because the limitation of the fair market value not exceeding the stamp duty valuation applies when assuming the fair market value from 1-4-2001 and does not apply in other circumstances, provided that a certificate from a registered appraiser supports the higher fair market value.
If the subsidiaries want to pay tax, they have the option to pay 20% on the indexed long-term capital gains or 12.50% on the non-indexed long-term capital gains. If they want to avail the exemption, they will have to invest the non-indexed long-term capital gains in a residential property under Section 54 or capital gains bonds 54EC.
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Balwant Jain is a tax and investment expert and can be reached at jainbalwant@gmail.com and at @jainbalwant on social media platform X (formerly Twitter)
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