55. The assessee an NRI wants to sell the house property of his father who purchased forty years back and died leaving behind his legal heirs i.e. his wife, son and his two daughters. The assessee needs your advice on the following issues: –

The assessee needs your advice on the following issues: –

(a) Does he have to pay tax on the amount that he receives?

(b) How can he avoid paying Tax?

(c) Does his mother who is a senior need to pay any tax?

As tax consultant advise the party accordingly with explanation.

1. Facts of the Case

The assessee is a Non-Resident Indian (NRI) who, along with his mother (a senior citizen) and two sisters, inherited a house property from his deceased father. The father had purchased the property approximately forty years ago. The legal heirs now intend to sell this property and divide the proceeds. The assessee seeks professional advice on:

• His tax liability upon receipt of sale proceeds;
• Ways to minimize or avoid tax legally;
• Whether his mother, being a senior citizen, is liable to pay any tax on her share.

2. Issues in the Case [Questions]

1. Is the NRI son required to pay income tax on the amount received from the sale of the inherited property?
2. Are there legal methods through which capital gains tax can be saved or minimized?
3. Is the mother of the assessee, who is a senior citizen, liable to pay tax on her portion of the sale proceeds?

3. Legal Principles Covered

a) Capital Gains on Sale of Inherited Property

Under the Income Tax Act, 1961, Section 45(1) treats capital gains from sale of assets (including inherited property) as taxable in the year of transfer. However, in case of inherited property, the cost of acquisition is deemed to be the cost to the previous owner as per Section 49(1).

Since the father purchased the property 40 years ago (i.e., before 2001), the cost of acquisition can be taken as the Fair Market Value (FMV) as on 1st April 2001, as per the amendment in 2017.

The gain will be considered a long-term capital gain (LTCG) and will be taxed at 20% with indexation benefit, under Section 112.

b) Tax Exemptions to Save LTCG

To avoid or reduce LTCG tax, the assessee can consider the following:

• Section 54: If the assessee invests the capital gain amount in purchase/construction of another residential house in India within the specified time limits, he can claim full or partial exemption.
• Section 54EC: If the assessee invests the capital gain (not sale consideration) in specified bonds (like REC/NHAI) within 6 months of sale (maximum ₹50 lakh per financial year), exemption can be claimed.
• Apportioning the Sale Proceeds: Each legal heir (mother, son, and two daughters) is individually liable to pay tax only on their respective share of the gain.

c) Tax Liability of Senior Citizen (Mother)

Even if the mother is a senior citizen, she is liable to pay capital gains tax only on her 1/4th share of the gain (assuming equal division among heirs), subject to availability of exemption under Section 54 or 54EC. The basic exemption limit for senior citizens (above 60 years) is ₹3,00,000, which can be used against taxable capital gain if not otherwise adjusted.

Further, if she does not reinvest the capital gains and the amount exceeds basic exemption, she will be taxed at 20% after indexation.

4. Possible Judgement / Tax Consultant’s Advice

• Yes, the NRI will have to pay tax on the capital gains portion (not the full sale amount) of his 1/4th share, after calculating indexed cost of acquisition based on FMV as on 01.04.2001.
• He can avoid or reduce the tax by:
  • Investing in another residential property in India under Section 54, or
  • Investing in Section 54EC bonds within 6 months of transfer.
• No TDS exemption is available for NRIs on sale of property, but the NRI can apply to the Assessing Officer for lower TDS certificate under Section 197.
• The mother, being a senior citizen, will also be taxed on her 1/4th share if capital gain exceeds ₹3,00,000 (basic exemption), but can also claim Section 54 or 54EC exemptions similarly.