Capital Gains on Sale of Gifted Assets

👉 The recipient (donee) of the gifted asset is responsible for paying capital gains tax when they sell it. The original giver (donor) has no tax liability on capital gains.

How it Works:

1️⃣ When the Gift is Given (No Tax on Donor or Recipient)

• Gifts from relatives (parents, spouse, siblings, etc.) are tax-free under Section 56(2)(x) of the Income Tax Act.
• Gifts from non-relatives are taxable if the total value exceeds ₹50,000 in a financial year (taxed as "Income from Other Sources").

2️⃣ When the Gifted Asset is Sold (Recipient Pays Capital Gains Tax)

• Cost of acquisition = Original purchase price of the asset (by the donor).
• Holding period = Includes both donor’s & recipient’s holding period.
• Tax applies based on Short-Term or Long-Term Capital Gains rules.

The capital gains tax is determined based on the holding period and the cost of acquisition:

• Short-Term Gains: For properties held less than 2 years (or less than 12 months for shares), tax is calculated using the formula:Sale Consideration−Cost of Acquisition−Cost of ImprovementSale Consideration−Cost of Acquisition−Cost of Improvement
• Long-Term Gains: For properties held more than 2 years, tax is calculated with indexation benefits:Sale Consideration−Indexed Cost of Acquisition−Indexed Cost of ImprovementSale Consideration−Indexed Cost of Acquisition−Indexed Cost of Improvement

The cost of acquisition is the same as the original purchase price paid by the donor (the person gifting the asset). Additionally, any cost of improvement incurred by the donor is included in the cost of acquisition.

👉 The holding period of a gifted asset includes both:
✅ The period the donor (giver) held the asset +
✅ The period the recipient (donee) holds it before selling.

Why is This Important?

The holding period determines whether capital gains will be classified as:

• Short-Term Capital Gains (STCG) – Higher tax rates.
• Long-Term Capital Gains (LTCG) – Lower tax rates & indexation benefits.

Example:

🎁 Father bought property in 2005 and gifted it to his son in 2023.
🏡 Son sells it in 2024.
📆 Total holding period = From 2005 (father’s purchase) to 2024.
✅ Since it's held for more than 3 years, it's a Long-Term Capital Asset.

• 👉 The recipient (donee) pays capital gains tax when selling gifted shares, not when receiving them.

  Step-by-Step Calculation:

  1️⃣ Determine the Cost of Acquisition 🏷️

  • The original purchase price (by the donor) is considered as the cost of acquisition.
  • Example: Father bought shares at ₹100 per share in 2015 and gifted them to his daughter in 2023.

  2️⃣ Holding Period Calculation ⏳

  • Includes both donor’s & recipient’s holding period.
  • If held for more than 1 year, it is Long-Term Capital Gain (LTCG).
  • If sold within 1 year, it is Short-Term Capital Gain (STCG).

  3️⃣ Tax Calculation 💰

  🔹 Short-Term Capital Gains (STCG) – If sold within 1 year:

  • Taxed at 15% on gains.

  🔹 Long-Term Capital Gains (LTCG) – If held for more than 1 year:

  • Tax-free up to ₹1 lakh per financial year.
  • 10% tax on LTCG exceeding ₹1 lakh (without indexation).

  Example Calculation:

  🎁 Father gifts 1,000 shares (bought at ₹100 per share in 2015) to his daughter in 2023.
  📈 Daughter sells them in 2024 for ₹500 per share.

  Capital Gains = (₹500 - ₹100) × 1,000 = ₹4,00,000

  • LTCG Tax = (₹4,00,000 - ₹1,00,000) × 10% = ₹30,000

Indexation benefits can be claimed on the sale of gifted assets if they qualify as Long-Term Capital Assets (LTCA), such as real estate, unlisted shares, gold, and debt mutual funds. However, listed shares and equity mutual funds do not get indexation benefits as LTCG on them is taxed at 10% without indexation. The holding period includes both the donor’s and recipient’s period, and the original purchase cost (by the donor) is indexed using the Cost Inflation Index (CII).

No, there are no exemptions specifically for capital gains tax on the sale of gifted assets. However, certain exemptions under Sections 54, 54EC, and 54F can be availed by reinvesting the gains in specific instruments like residential property or bonds.

1️⃣ Invest Under Section 54 (Buying Another Property) 🏠

• If you sell a residential property, reinvest the capital gains in another residential property in India.
• Deadline: Buy within 1 year before or 2 years after, or construct within 3 years.
• Exemption Amount: The lower of capital gains or the new property cost.

2️⃣ Invest in Capital Gains Bonds Under Section 54EC 📜

• If selling land or a building, invest up to ₹50 lakh in 54EC bonds (REC, PFC, NHAI, IRFC).
• Deadline: Within 6 months of sale.
• Lock-in period: 5 years (earlier, it was 3 years).
• Fully exempts capital gains from tax.

3️⃣ Claim Exemption Under Section 54F (For Non-Residential Property) 🏗️

• If selling land, commercial property, or other capital assets, reinvest entire sale proceeds into a residential property.
• Condition: You should not own more than one residential house (other than the new one).
• Deadline & Exemption Rule: Same as Section 54.

4️⃣ Set Off Against Capital Losses 🔄

• If you have long-term capital losses (LTCL) from other investments, offset them against long-term capital gains (LTCG) from the property sale.

5️⃣ Deposit in Capital Gains Account Scheme (CGAS) 🏦

• If you need time to buy a new property, deposit gains in a Capital Gains Account in a bank before the ITR filing deadline.
• Use the funds within 2–3 years to buy/construct property; otherwise, they become taxable.

Yes, specific rules apply when calculating the holding period of inherited or gifted assets. The key principle is:

👉 The holding period includes both the period the donor (or previous owner) held the asset and the period the recipient (donee) holds it before selling.

1️⃣ Why is the Holding Period Important?

It determines whether the capital gains are classified as:
✔ Short-Term Capital Gains (STCG): Higher tax rates.
✔ Long-Term Capital Gains (LTCG): Lower tax rates & indexation benefits.

2️⃣ When is an Asset Considered Long-Term?

🔹 Real estate, unlisted shares, gold, debt funds, etc.: Held for more than 2 years → LTCG.
🔹 Listed shares, equity mutual funds, bonds, etc.: Held for more than 1 year → LTCG.

3️⃣ How Holding Period is Calculated for Gifted/Inherited Assets

• The holding period starts from the original purchase date (by the donor/testator), not the date of inheritance or gifting.
• When the recipient sells the asset, the total holding period (donor’s + recipient’s) is considered.

Example

🏡 Father bought a property in 2005 and gifted it to his son in 2023.
📆 Son sells it in 2024.
📊 Holding period = From 2005 to 2024 (19 years) → LTCG.