Capital Gains Tax on Inherited Property Redevelopment

Background

A group of three siblings inherited a commercial property from their parents, which underwent redevelopment. They sold 100 square feet of the property, receiving approximately Rs 7 lakh each, and are seeking advice on their tax liability for the transition in FY 2025-26.

Taxation Liability

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The redevelopment of the commercial property is considered a transfer of capital assets under the Income-tax Act. According to the law, capital gains for redevelopment become taxable in the year the completion certificate (CC) is issued by the competent authorities. However, if the taxpayer sells the capital asset before completion, the transaction becomes taxable in the year of sale.

Computation of Capital Gains

The stamp duty value of the redeveloped asset is treated as the sale consideration for computing capital gains. The net sale consideration is deemed to be invested in the newly acquired redeveloped assets.

Exemption from Long-term Capital Gains (LTCGs)

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Section 54F provides an exemption for LTCGs arising on the sale of commercial property if the net sale consideration is invested in a residential house property. However, this exemption is not applicable in this case, as the siblings are receiving a commercial property, not a residential one.

Tax Rates

The siblings will have to pay Long-term Capital Gains (LTCG) tax at either 12.50 percent on plain gains or 20 percent on indexed long-term gains. Since the property was acquired before April 1, 2001, they can use the fair market value of the area sold as their cost to calculate the tax liability.

Action Items

• Calculate the tax liability using the fair market value of the area sold as the cost.
• Pay LTCG tax at either 12.50 percent or 20 percent, depending on the applicable rate.