I am an NRI in Canada. My ancestral property is being sold in India. What can I do to save tax?

Mrinal Mitra is an NRI living in Canada. Recently, he shared with us that his ancestral home in Kolkata is being sold and he is expecting his part to be around Rs 15 lakh. Mrinal said the money will be deposited in a joint account with his daughter in State Bank of India, New Delhi. However, his daughter is still a student in Canada.

Mrinal wanted to know what could he do with the money received from the sale of his ancestral property to avoid long-term gain tax (if there is any). Also, can he invest the money in any SBI plan?

Shruti K.P, Partner, INDUSLAW, has answered Mrinal’s queries:

We assume that the ancestral property referred to here was a residential house property inherited by you and is a long-term asset due to the period of holding of the previous owner also being included. Note that for the purpose of computing taxable capital gains, as per the Income-tax Act, 1961 (“ITA”), you may be eligible to claim a deduction of the cost for which the previous owner of the property had acquired it, proportionately to the extent of your share. You may also be eligible for indexation benefits.

Note that to save on long-term capital gains tax, you may either invest in a residential house property (“RHP”) in India under Section 54 of ITA or invest in specified long-term bonds in India as per Section 54EC of ITA.

Per Section 54 of the ITA, you may invest the amount of the capital gains for purchasing a new RHP in India within 1 year before the transfer, or within 2 years from the date of transfer or by constructing a new RHP in India within 3 years from the date of transfer.

Also Read: Sold ancestral property? Know the rules for parking or investing sale proceeds to save tax

If the amount of the capital gains is not utilised for the purchase or construction of the new asset before the furnishing of return of income, you can still claim the benefit by parking the sale proceeds on account of the sale of RHP under the Capital Gain Account Scheme, 1988 (“Scheme”) before furnishing the return of income. The amount so deposited under this Scheme shall be deemed to be the cost of the new asset and shall be eligible for the purpose of claiming exemption under Section 54 of the ITA. For this purpose, you can open a Capital Gain bank account in any of the banks notified by the government, which are typically scheduled banks such as the State Bank of India.

Further, as per the provisions of Section 54EC of the ITA, you may also save tax on the amount of the capital gains by investing in the long-term bonds issued by the National Highways Authority of India (“NHAI”) and RECL within a period of 6 months from the date of transfer of property.

Also Read: I sold my flat for Rs 36 lakh. Where can I park this money before buying REC Bonds to save tax?

With respect to the receipt of the sale consideration in an account jointly held by you with your daughter, we understand that your daughter does not have any share in the property sold. Hence, tax implications, if any may only be in your hands and there may be no tax implications in the hands of your daughter as she was not the owner of the property.

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