How are legal heirs taxed on sale of property

A friend died and his property is now being sold by his wife and their four children—a son and three daughters. The sale deed has been signed by all five people and the amount from the sale is being deposited into the son’s account. Now, the daughters want to gift the entire sale proceeds to their brother and mother, who want to reinvest this amount and purchase a new property.  Will long term capital gains (LTCG) be applicable in this case and who will need to pay it?



Based on the limited facts provided by you, we understand and assume that the property was owned by the father and has been inherited by the mother and their four children, in equal share. Further upon sale, the sale deed has been entered into by all five family members. Also, there does not exist any family arrangement whereby rights to the property have been relinquished by any member prior to the sale.

Assuming that the property was held for more than 24 months before sale (including the period the property was held by father), the same shall be considered as long-term capital asset. 

Since the mother and the four children are the legal owners, any income / gain arising from the sale thereof will be taxable in their respective hands as LTCG to the extent of their respective share.

Further, as per the provisions of section 54 of the Income-tax Act, 1961, deduction is eligible to be claimed in respect of LTCG invested towards purchase of one residential house property in India (where LTCG does not exceed 2 crore, investment is also permitted in two house properties for the purpose of this exemption, once in a lifetime), within 1 year before or 2 years after the sale of the original house, or towards construction of residential house within three years. The maximum deduction is restricted to the amount of LTCG earned from sale of house.

Thus, respective owners (with 1/5th share each) shall have to claim deduction against their respective LTCG share, for the amount invested by them towards purchase of new residential property. It is important to note that to claim such deduction, it is required that the assessee has purchased or constructed new residential house property within specified period. Any claim of exemption wherein the new house has not purchased/ constructed in the name of the respective assessee is debatable, with conflicting judicial precedents and possibility of litigation cannot be ruled out. If there was any family arrangement (prior to the sale) whereby the sisters have relinquished their rights in the property to the mother/ brother, then the taxability in each individual’s hands may differ and would be evaluated separately.

Additionally, the amount gifted by the sisters, being defined relatives as per provisions of section 56(2)(x) of the Act, will not be considered as taxable income in the hands of mother / brother.

Stamp duty aspects (if any) of the entire transaction have not been commented on by us.

Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India.

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