My father bought a flat in Chennai, in 1998. He passed away in 2022. My brother and I are my father’s legal heirs. I decided to buy my brother’s portion of the above flat with cash. My brother is an NRI. What is the tax implication for my brother in this transaction?

 J. Rajagopalan

We understand that the individual’s father had purchased a flat in Chennai in 1998 and post his demise, it was inherited by the individual and his brother.

As per section 56 of the Income-tax Act, 1961 (“The Act”), the inherited flat qualifies as not liable to income tax as it is an event of a transfer by way of inheritance (without any consideration) to legal heirs. Therefore, the initial transfer to individual and his brother will not attract any liability to income tax.  

As per section 45 of the Act, any profits or gains arising from the transfer of a capital asset are chargeable to income tax under the head ‘Capital Gain’ and shall be deemed to be the income of the year in which the transfer took place. Hence, when the individual decides to take over his brother’s stake that transaction would be subject to tax in India in his brother’s hands as it would tantamount to transfer of a capital asset by him.

We assume that the individual would compensate his brother either through cheque/bank draft/other electronic modes since under section 296ST of the Act, there are restrictions to acceptance of cash over ₹2 lakh limit.

A capital asset held by a taxpayer or Previous Owner (in case of inheritance) for more than 24 months immediately preceding the date of its transfer is treated as a long-term capital asset and subject to tax at 20 per cent, excluding surcharge (if applicable) and cess on the variance between the cost of acquisition and the sales proceeds. This would, of course, be proportionate to the brother’s share of ownership in the flat.

This transaction would be eligible for a deduction of cost of acquisition and improvement on which indexation benefit would apply. Further, any expenses related to transfer of the flat may also be claimed as a deduction from the sale proceeds.

In case of sale of inherited capital asset, the cost of acquisition and acquisition year would be taken as of previous owner restricted to the share part of the previous owner in the capital asset.

As per the Act, the cost of acquisition for the property held before April 1, 2001, will be;

1.   Cost of acquisition or

2.   FMV as on April 1, 2001, whichever is higher.  

In case of transfer of long-term capital assets, indexed cost of acquisition and indexed cost of improvement shall be deducted from the full value of consideration. The base year for computation of capital gains has been shifted from 1987 to 2001 with effect from Financial Year 2017-18. Thus, if any capital asset (acquired before April 1, 2001) is transferred, then taxpayer has an option to take its cost of acquisition as fair market value as on April 1, 2001.

Please take note that we have not commented on the withholding tax obligations and foreign exchange implications on this transaction.

The writer is a Partner with BDO India LLP

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