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Do I have to pay income tax on sale of an ancestral house?

We had constructed a house in 1995 after demolishing our ancestral house of my grandfather. We all five siblings are married. Now we want to sell the ancestral house in native place. Each one will receive 10 lakhs. Will we have to pay any tax on it? Is there any way to save tax?

As you have held the property for more than 24 months, the profits shall be taxed as long-term capital gains. Since the house was constructed in 1995 you will have to take the market value of the house as on 1st April 2001 for computing the capital gains as the Fair market Value (FMV) of the house on 1st April 2001 can be taken as its cost for computing your capital gains. For obtaining the FMV you will have to get in touch with a valuer of property and obtain a valuation report from him. 

Please note that the FMV value of the house cannot be lower than the stamp duty valuation or circle rate as is popularly known. On this FMV you have to apply the Cost Inflation Index (CII) to arrive at its indexed cost. The difference between the sale prices and the indexed cost is the long term capital gains. 

It seems you all five siblings have inherited this property, so 1/5 of the long term capital gains computed in the manner explained above will become taxable in the hands of each one of you. You have to pay tax at flat rate of 20.80% on such long-term capital gains. You can save the capital gains tax either by investing the long term capital gains for buying or constructing a residential house within prescribed time limits under Section 54 or by investing the long term capital gains in capital gains bonds of REC, NHAI, RFC or PFC within 6 months from the date of sale of the house under Section 54EC.

Balwant Jain is a tax and investment expert and can be reached on jainabalwant@ gmail.com and @jainbalwant on Twitter


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