During a marriage, assets transferred from one spouse to another do not attract income tax implications because such a transfer is considered a gift. Such gifting is exempted from income tax implications under the provisions of Section 56 (ii) of the Income Tax Act, 1961. However, this is true only if no monetary exchange takes place.
When a married couple sells such a property, the profit generated from the sale is clubbed with the income of the donor, i.e., if the husband gifted a property to his wife who later sold the property, the husband would be responsible for paying the tax.
However, if a property is received as a part of a divorce settlement, the tax implication regulations would be different. Once the matrimonial bond ends, the ‘family’ aspect disappears. Hence, if the wife sells a house, which she received as a part of the divorce settlement, she alone would be liable to pay the capital gains tax on the profit received.
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How is the capital gains tax on property sales calculated?
Capital gains are the profit made on property sales. Hence, the profit earned by the sale becomes taxable. To ascertain the amount on which capital gains tax must be paid, the cost of acquisition by the original owner would be considered.
‘This means that if the husband bought the property for Rs 50 lakh, transferred it to the wife at the time of divorce and the now-ex-wife sells it for Rs 70 lakh, the profit earned on the sale would be Rs 20 lakh on which the wife must pay capital gains tax, depending on the holding period,’ explains Prabhanshu Mishra, a Lucknow-based lawyer.
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Holding period of the asset
For capital gains tax calculation, the asset holding period is classified as short-term capital gains and long-term capital gains.
Any immovable asset that is held by the owner for less than 24 months is considered short-term. A period exceeding 24 months is considered a long-term capital holding.
When the ex-wife sells the property received during the divorce, the holding period would include the total time, starting from the time of original purchase to the time of final sale.
‘This means that if a property was purchased in, say January 2020, given as a divorce settlement in January 2021, and sold in March 2022, the total holding period would be 26 months. The profit made on such a sale would qualify as long-term capital gains,’ mentions Mishra.
Wondering how to save capital gains tax on property sale. Refer to our complete guide.
Rate of tax
In case the sale qualifies as a long-term capital gain, the rate of tax would be 20%. This means, on a profit of Rs 20 lakh, the seller would be paying Rs 4 lakh in capital gains tax.
If the seller plans to invest the profit for buying or building another home, they can claim tax deductions under Section 54 of the income tax law. The same is true if the profit is invested in government-specified bonds.
In case the property is sold in less than 24 months of purchase, the profit earned will be clubbed in their annual income and taxed accordingly. ‘That way, your tax liability could be a lot higher, unless you are a housewife and have no source of income,’ says Mishra.
An alumna of the Indian Institute of Mass Communication, Dhenkanal, Sunita Mishra brings over 16 years of expertise to the fields of legal matters, financial insights, and property market trends. Recognised for her ability to elucidate complex topics, her articles serve as a go-to resource for home buyers navigating intricate subjects. Through her extensive career, she has been associated with esteemed organisations like the Financial Express, Hindustan Times, Network18, All India Radio, and Business Standard.
In addition to her professional accomplishments, Sunita holds an MA degree in Sanskrit, with a specialisation in Indian Philosophy, from Delhi University. Outside of her work schedule, she likes to unwind by practising Yoga, and pursues her passion for travel.
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