Selling a Property Gifted by Parents: Understanding Tax Implications

Ram Naik’s father gifted him a flat in Noida in December 2023. This flat was originally purchased by his father in April 2005 for a total consideration of ₹5 lakh. Naik intends to sell this flat in September 2025 for a total consideration of ₹50 lakh. In such a scenario, how will the capital gains tax be computed?

While a property received as a gift from parents is not taxed, if you decide to sell it later, you will be liable to pay capital gains tax on the profit you make from the sale. “Even though you got the property without paying anything, the Income-tax Act doesn’t treat the cost of the property as zero. Instead, you inherit the cost and holding period of the person who gave you the property (the donor),” says Rahul Singh, senior manager, Taxmann, tax and corporate advisor.

When a gifted property is sold by the donee, the gains that arise on the sale of such assets are subject to long-term capital gains. The rate of tax levied will depend on the period of holding in the hands of the donee. In case the donee holds the asset for more than 24 months, then his gains shall be taxable as long-term capital gains at the rate of 12.5%. If the period for which the asset has been held is less than 24 months, short-term capital gains tax will be levied at the rate of 20%. If the property was acquired prior to July 23, 2024, the donee/seller can also claim the benefit of indexation, but in such a scenario, they shall be liable to pay tax at the rate of 20%.

“Where an asset is acquired by gift, the period of holding shall be reckoned from the date when the previous owner had acquired such asset. Thus, the period of holding in the hands of the donor shall also be included while computing the period of holding in the hands of the donee,” says Rashi Khanna, Associate Partner, DMD Advocates, a law firm. Moreover, in terms of Section 49 of the Income-tax Act, 1961, the cost of acquisition in the hands of the previous owner shall be deemed to be the cost of acquisition in the hands of the donee.

In terms of the prevailing law, Naik shall be liable to pay long-term capital gains tax in respect of gains arising on the sale of the flat as the period of holding shall be reckoned from the date his father acquired the flat. “Also, as the property was acquired prior to July 23, 2024, he is entitled to claim the benefit of indexation and pay taxes on the resultant gains at the rate of 20%. Furthermore, the cost at which the flat was acquired by Naik’s father will be deemed to be the cost of acquisition in the hands of Naik,” says Khanna.

Legal compliance is crucial when gifting property. As regards the taxation of gifts under Section 56(2)(x), it is imperative to highlight that gifts from individuals who do not fall within the narrowly defined ambit of “relative,” as prescribed under the Explanation to Section 56, may be liable to taxation in the hands of the recipient if the stamp duty value exceeds ₹50,000. The term “relative” encompasses spouse, siblings, lineal ascendants and descendants, and certain other relations, but does not include cousins or friends.

Therefore, due diligence must be exercised in evaluating the familial relationship to ensure tax neutrality of the gift. Exceptions are also carved out for gifts received on the occasion of marriage, by way of inheritance, or in contemplation of death. From a compliance and legal enforceability standpoint, it is indispensable that the gift of immovable property be executed through a registered gift deed under Section 17 of the Registration Act, 1908, and attract appropriate stamp duty as per the applicable State laws. The absence of registration renders the gift legally void and incapable of being acted upon in law.

Proper documentation not only secures clear title but also serves as primary evidence of ownership in the hands of the donee, thereby becoming critical at the time of future alienation and in securing the appropriate tax treatment under the Act. Legal advice must be sought at the time of execution to ensure that the transaction withstands scrutiny both under property law and the tax statute.