Redeveloping inherited property? Tax rules you need to know if selling a portion

Tax implications of redeveloped property

• Capital gains tax applies when inherited property is redeveloped
• Tax is due when the asset is sold or completion certificate issued.
• No Section 54F exemption as proceeds are from commercial property

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How is the capital gains tax calculated when an inherited property undergoes redevelopment and a portion of it is sold. Today's Ask Wallet Wise query decodes how and when the tax liability arises.

The Ask Wallet-Wise initiative offers expert advice on personal finance and money-related queries. You can email your queries to askwalletwise@nw18.com, and we will try to get a top financial expert to address them.

We are three siblings and have inherited a commercial property from our parents. The property has gone for redevelopment. We have sold 100 square feet. The proceeds have been divided equally among three of us, about Rs 7 lakh each. The transition is in FY 2025-26. Please advise regarding taxation liability.

Expert's advise: Surrendering the old commercial property in exchange for a new unit or monetary compensation is considered a transfer under Section 2(47). Redevelopment of a commercial property through a builder is treated as a transfer of capital assets under the income-tax act.

As far as the point of time when the capital gains for such redevelopment become taxable for individuals and HUFs, the law provides that the same become taxable in the year in which the completion certificate (CC) for the new project is issued by the competent authorities.

In case the taxpayer sells the capital asset before the project is completed, the transaction becomes taxable in the year in which the capital asset is sold by the tax payer.

The stamp duty value of the redeveloped asset is treated as the sale consideration of the asset redeveloped for computation of capital gains. At the same time, the assessee is deemed to have invested the net sale consideration in the newly acquired redeveloped assets.

Section 54F provides for exemption from long-term capital gains (LTCGs) arising on sale of commercial property if the net sale consideration is invested in a residential house property. You are not eligible for this exemption, as you are not getting a residential property but a commercial property, which is not eligible for this exemption. If the redevelopment was done by you or the members of the society it would not have been treated as transfer for income tax purpose.

In respect of the area sold by you, you will have to pay LTCG tax either at 12.50 percent on plain gains or at 20 percent on indexed long-term gains. Since the property has gone into redevelopment, I have assumed that the same was acquired before April 1, 2001, and therefore, you can take the fair market value of the area sold as your cost and work out the tax liability accordingly.