Jigar M. Patel
International Tax Attorney
In April 2023, Mr. Amdavadi received under the Will of his grandfather a plot of land. His grandfather had acquired the said land for Rs. 60 lakhs in FY 2001-02. Mr. Amdavadi plans to sell the same in May 2023 for a consideration of Rs. 2 crores, but is concerned about the capital gains tax liability in his case. Difficult to believe, but ‘Zero Tax’ would be the right answer for him. But then, how would one explain this logic to him?
Tax Shelter for Capital Gains on Gifted or Inherited Assets
From a layman’s point of view, where a capital asset has been acquired by a taxpayer through gift, by way of inheritance or under a Will, since there would be no effective cost of acquisition, the entire sale consideration may become taxable as capital gains.
Similarly, for enjoying the benefit of concessional tax rate on long-term capital gains in respect of an immovable property, the common perception would be that the taxpayer in such a case would be required to hold the same at least for a period of 24 months.
However, the concessional provisions of Section 49 and Section 2(42A) respectively under the Income-tax Act provide that where a capital asset is acquired through such special modes of acquisition, the cost of such asset and the period of holding of the previous owner from whom such an asset is received, shall be deemed to be the cost of acquisition and the period of holding of the taxpayer.
Courts weave the Magic of Indexation!
In the case referred to hereinabove, if just the aforesaid two concessional provisions were taken into consideration, Mr. Amdavadi’s taxable capital gains (though deemed as long-term) would still have worked out to Rs. 1,40,00,000 (Rs. 2 crores – Rs. 60 lakhs), attracting a significant tax liability of Rs. 33,48,800 at the flat rate of 23.92% (inclusive of surcharge and cess).
However, several judicial pronouncements of various High Courts, including the jurisdictional Gujarat High Court, have granted a unique tax shelter in all such cases holding that while computing the taxable capital gains arising on transfer of such capital assets acquired through the above referred special modes of acquisition, the taxpayer would be entitled to avail of the benefit of Indexed Cost of Acquisition with reference to the year of acquisition of the previous owner and not the year in which the recipient of such asset became the owner.
Keeping in view the aforesaid judicial ratio, Mr. Amdavadi would be entitled to adopt the Cost Inflation Index (CII) of 100 as notified for FY 2001-02 (being the year of acquisition of his grandfather). The CII for FY 2023-24 (being the year of sale) as recently notified is 348. Considering the purchase price of Rs. 60 lakhs in FY 2001-02, the Indexed Cost of Acquisition in the year of sale FY 2023-24 would work out to Rs. 2,08,80,000, not only resulting in zero gain, but a notional loss of Rs. 8,80,000, which can be smartly set off against any other taxable long-term capital gains.