Capital gain on a flat received through a gift and a will, with exemptions under sections 54 and 54EC (as set, 1961 Act, AY 2018-19)

Readings

1. The flat is read as a residential house whose income is chargeable under the head Income from house property, so section 54 can apply.
2. Sumit's only income for 2017-18 is this capital gain; no other income is given.
3. The indexation runs from the first year in which the flat was held by Rohit, the previous owner (explained below); the result if it runs from 2016-17, the year Sumit received it, is given at the end.

Cost and period of holding

• Rohit bought the flat on 01.07.2002 for ₹12,00,000. Chetan received it by gift and Sumit by will, both modes named in section 49(1)(ii). So Sumit's cost is the cost to the previous owner, ₹12,00,000; the previous owner is the last owner who acquired it otherwise than by such a mode, that is Rohit (Explanation to section 49(1)).
• The period for which the flat was held by Rohit and Chetan counts as Sumit's (Explanation 1(i)(b) to section 2(42A)). Held from 01.07.2002 to 12.10.2017, far more than 24 months, it is a long-term capital asset.
• Because the earlier owners' holding is treated as Sumit's holding, the first year in which the asset was held by the assessee (Explanation (iii) to section 48) is taken as 2002-03, index 105. Sale year 2017-18, index 272.
• Sumit's own improvements are indexed from the years in which he made them (Explanation (iv) to section 48).

Computation of long-term capital gain

Exemptions

• Section 54: the gain is more than the cost of the new house, so the exemption is that cost, ₹35,00,000.
• Section 54EC: for an investment made before 1 April 2018 the long-term specified asset is a bond redeemable after three years (Explanation (ba)(i) to section 54EC), and the investment within six months of the transfer is within the ₹50 lakh limit, so ₹8,00,000 is exempt.
• Units of the Equity Linked Savings Scheme, ₹1,95,000: these give no exemption from the capital gain. They qualify under section 80C(2)(xiii), limited to ₹1,50,000, but deductions under Chapter VI-A are not allowed against long-term capital gains (section 112(2)); Sumit has no other income, so the deduction is nil.

Taxable income of Sumit

The gain is taxed at 20% under section 112(1)(a), after setting the unused basic exemption limit against it (its proviso; the basic exemption limit of Finance Act, 2018, First Schedule, Part I, Paragraph A).

If the facts are read otherwise

If the indexation runs from 2016-17, the year Sumit became owner, the indexed cost of acquisition is ₹12,36,364, the long-term capital gain ₹71,84,000, and after the same exemptions of ₹43,00,000 the taxable income is ₹28,84,000.