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How will I be taxed on sale of a joint property?

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My two daughters jointly purchased a residential plot in August 2007 within an established housing complex in Rajasthan. I entered into an agreement with my daughters in July 2012 and took the rights of constructing a residential house in that plot at my own expenses. It was also agreed that I would earn any rental income and pay taxes as applicable. The construction was completed in July 2013 and the building was rented out that very month, with a lease agreement duly executed with  the tenant.

I gifted the residential constructed property in August 2021 to my daughters by way of a suitably worded gift deed, duly notarized. 

The sale deed was executed and registered with the local authority, sub-registrar Neemrana, in September 2022. However, I shall continue to earn rental income till the sale of the entire property, as per the July 2012 joint agreement. 

My daughters have now proposed to sell the property before 31 March  2023. How will LTCG on  the plot from its date of purchase, i.e August 2007, and LTCG of the residential house built later, i.e. July 2013, be computed when the total property is sold?

Will LTCG and tax benefits U/S 54EC be equally split among the joint owners after taking into consideration the stamp duty, brokerage and other related expenses including the major construction cost of the residential house?

Name withheld on request

Since, the terms of the agreement or the gift deed are not available, it is not clear whether you had the ownership title of the residential house constructed by you or only the rights to use/ let out the residential house, which was subsequently gifted by you in equal proportion to the daughters in August 2021. 

Since the property (plot of land and the constructed residential house) was held for a period of more than 24 months prior to sale, the entire property will qualify as long-term capital asset (LTCA) and the income arising from its sale shall be considered as long-term capital gain (LTCG).

The cost of such property in the hands of your daughters shall be the cost of the plot as increased by the cost of construction incurred by you and the stamp duty, and brokerage charges incurred for registration of the property. Also, while computing the LTCG, your daughters are eligible for the benefit of indexation in respect of the cost of the property (wherein the cost of plot shall be indexed from 2007 whereas the cost of construction / other charges shall arguably be indexed for the respective year of payment).

Also, LTCG shall be split among the daughters in the proportion of investments made by them at the time of purchase. 

Further, the available deductions as applicable (including under section 54EC), shall be available to both the daughters in proportion of specified investments made by them individually against their respective share of LTCG income.

Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India.

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