A non-resident seller of inherited property may face a 12.5% long-term capital gains tax without indexation, often pushing total income above the surcharge threshold. Today's Ask Wallet Wise query decodes how strategic reinvestment can help reduce the tax burden and avoid surcharge.
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I, along with my two brothers, inherited a one-third share of a residential house under a Will executed by my father. He had purchased the property in 1978. The house was sold in October 2025 through a registered sale deed, and each brother received Rs 88 lakh as his share of the sale proceeds.
A valuation certificate issued by a registered valuer states the fair market value of the property as on 1 April 2001 at Rs 66 lakh. I have been filing my Income Tax Return (ITR) as a non-resident for the last few years. I also own two other residential flats in Noida, both of which are let out, and the rental income is disclosed in my ITR. My brothers are residents of India.
I understand that the difference between one-third of the fair market value (as per the valuation certificate) and my share in the property, without indexation benefit, will be taxed at 12.5%. I intend to purchase another residential house from my share of the sale proceeds. In view of long-term capital gains being taxed at 12.5% without indexation, my total income becomes subject to surcharge. Please advise on the way forward.
Expert's Advice: For capital assets acquired before 1 April 2001, the taxpayer has the option to adopt the fair market value (FMV) as on 1 April 2001 as the cost for computing capital gains. This applies not only to the original owner but also to a person who acquires the asset without consideration, such as through gifts from specified relatives, inheritance, or under a Will.
To determine the FMV of a capital asset as on 1 April 2001, you may obtain a valuation certificate from a registered valuer. However, in the case of immovable property, the valuation in the certificate cannot exceed the stamp-duty valuation for the same date.
Assuming the valuer’s FMV is correct, your long-term capital gain is Rs 66 lakh (Rs 88 lakh minus Rs 22 lakh, being one-third of the FMV as on 1 April 2001).
A resident individual or HUF can choose to pay tax at 12.5% on plain capital gains or at 20% on unindexed capital gains for land and buildings acquired prior to 23 July 2024. Since you are a non-resident, the option of indexation is not available, and the applicable tax rate is 12.5%.
Surcharge becomes applicable when the total taxable income exceeds Rs 50 lakh. Since your income, including the capital gain of Rs 66 lakh, crosses this threshold, you have two options to bring down taxable income and avoid surcharge:
Option 1: Invest in a residential property (Section 54)
Invest the entire long-term capital gain of Rs 66 lakh in a residential house within the prescribed time period. This will allow full exemption.
Option 2: Invest in 54EC bonds
Invest up to Rs 50 lakh in notified capital-gains bonds within six months of the sale. The remaining Rs 16 lakh will be taxed at 12.5%.
Using either of the above, or a combination of both, will reduce your taxable income below the surcharge trigger limit.
This advice is based on the presumption that the FMV in the valuer’s certificate does not exceed the stamp-duty valuation as on 1 April 2001.
Since you file your ITR regularly, you may also claim a refund of the tax deducted by the buyer at the time of sale.
Disclaimer: The views expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.
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