In 1971, my grandfather constructed a house on a plot purchased by him. In 2015, my father demolished it and constructed a new house from his own funds and in 2016 my grandfather gifted the same house to me. How do I calculate the indexation if I were to sell the house?
— Surat Singh
We assume that the new house (constructed by your father in 2015) continued to be in the name of your grandfather before being gifted to you in 2016. We have also assumed that the demolition of old house and construction of the new house was carried by your father with his funds, without any legal rights in the new house being assigned to him.
In such a case, one could argue that the new house was deemed as gifted by your father to your grandfather. It is also assumed that you will sell the entire property (including the plot of land on which the same is constructed).
Since, in your case, the plot of land was acquired in 1971 and a new house was constructed on the same plot of land in 2015, the indexed cost of acquisition may be computed separately in respect of plot and the new house sold, as per provisions of the income tax (I-T) Act.
On a combined reading of Section 49 and Section 55 of the Act, the cost of acquisition of the plot in your hands would be the cost of acquisition for your grandfather (i.e. cost at which he acquired the plot and constructed the property in 1971 or the FMV (not exceeding the stamp duty value) as on 1 April 2001, whichever is higher).
Since the plot was held for more than two years, you are eligible for the benefit of indexation and the indexed cost of plot would be calculated by applying the following formula:
Indexed cost of acquisition = cost of acquisition multiplied by the cost inflation index (CII) of the year in which asset is sold, divided by CII for the year in which plot was first held by previous owner or FY 2001-02 (whichever is later) i.e. FY 2001-02 in your case.
In relation to the cost of acquisition of the new house constructed by your father in 2015, if it can be substantiated that the same was gifted by your father to your grandfather and then by your grandfather to you, the cost of construction incurred by your father for the new house in 2015, may be considered as cost of acquisition in your hands for the new house.
As the period of holding of the new house constructed in 2015 is more than two years, the gain on sale of the new house in your hands would be LTCG and you are eligible for the benefit of indexation and indexed cost of house would be calculated by applying the following formula: Indexed cost of acquisition = cost of acquisition multiplied by CII of the year in which asset is sold, divided by CII for the year in which new house was first held by previous owner, i.e., FY 2014-15/ 2015-16 as the case may be.
Any deduction towards the original cost of construction incurred by your grandfather in 1971 or cost of demolition of the old house property may be highly litigious and may need to be evaluated further. It would be important to review the exact arrangement and documents executed for the stated transactions to conclusively comment on the same.
Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India.