How capital gains tax apply when an inherited house is sold, and proceeds are shared?

• Capital gains tax applies to inherited house sale, based on fair market value
• Tax liability falls on the registered owner, even if proceeds are shared
• Renovation costs can be claimed, but maintenance expenses cannot reduce tax

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On the sale of an inherited house, capital gains tax is computed using the fair market value. Today’s Ask Wallet Wise explains why the property owner bears the tax liability, though the proceeds were equally distributed among four siblings.

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My father, along with his siblings, sold a house inherited from their father during the current financial year. The sale proceeds were equally distributed among the four siblings. I would like to understand whether any tax liability arises for my father and whether expenses incurred on renovation or maintenance can be claimed to reduce the tax liability.

Expert’s Advice: It seems that though the house was inherited by the four siblings, the mutation was done in the name of your father. Income tax laws provide for the taxation of profits made on the sale of a capital asset. Profits are computed after deducting costs from the net sale price realised.

For assets acquired through gift or inheritance, the cost of acquisition is deemed to be the price paid by the previous owner. If the house was purchased before April 1, 2001, its fair market value as of that date may be adopted for computing capital gains. However, this fair market value cannot exceed the stamp duty value applicable on April 1, 2001.

The profits are taxed as long-term capital gains if the capital asset sold was held for more than 24 months. The period is counted from the original buyer who had paid for it. Since the house was inherited, it is logical to presume that the combined holding period of the house sold is more than 24 months.

Coming to the question of tax liability, it will depend on who held ownership of the house at the time of sale. Since the house was registered in the name of your father, it is your father who is liable to pay tax at 12.50% plus cess and surcharge on the capital gains.

As your father is liable to pay tax on the long-term capital gains, the proceeds should ideally have been distributed after accounting for his tax liability. He may now recover the proportionate tax amount from the other siblings.

No deduction is available in respect of maintenance costs incurred; however, you can include the cost of renovation in the cost of the house for computing capital gains.