How to calculate capital gains and tax liability on inherited property

Shobhana has inherited a non-agricultural plot worth Rs 10 lakh from her late grandmother. The plot was bought before 1980. What are the tax implications for Shobhana? Will she have to pay tax on her inheritance, considering the plot will be transferred in her name? 

What if she wants to sell the property? Will the proceeds be fully tax-exempt, since she only inherited it and did not acquire it? Considering that no cost of acquisition is available, how will she compute the gains for taxation purposes? 

There is no tax liability for Shobhana at the time of inheritance. However, any profits made on the sale of inherited land are taxable as capital gains.This implies that should Shobhana decide to sell it, capital gain from sale of the inherited property will be fully taxable in her hands. Therefore, it is important that she secures the documents substantiating the inheritance of land. 

Having said that, the period of holding will be considered from the date of purchase by her grandmother. The cost at which her grandmother bought the house prior to 1980 shall be considered as cost of acquisition. But since the cost of the land is not available and the same has been acquired before 1 April 1981, fair market value of the land as on 1 April 1981 can be considered as the cost of acquisition. For ascertaining the same, Shobhana must engage the services of a registered valuer. 

The LTCG shall be computed as the difference between net sale proceeds and indexation cost of acquisition. For indexation, the cost of acquisition should be adjusted by applying the cost inflation index (CII). CII for 1981-82 and the financial year in which Shobhana sells the property will be considered. 

The year of inheritance has no importance in the calculation of long-term capital gains. She can also add the costs incurred with respect to procedures associated with the will and inheritance, obtaining succession certificate, costs of executor, property valuer etc. while computing the cost of acquisition. 

In case there are any residual capital gains, Shobhana may have to either pay tax on it at the rate of 20% or save capital gains tax ax by buying specified bonds u/s 54EC. 

Why you should not stop SIP despite stock market hitting new highs

Lakhs of investors have turned to systematic investment plans (SIPs) of mutual funds in recent months. SIP inflows have increased rapidly—investors pump in close to Rs 4,500 crore every month through this option, compared to just Rs 1,200 crore a month in early 2014. The average ticket size of a SIP has also jumped from Rs 1,800 to Rs 3,200 per month today. 

At the same time, some investors are feeling concerned about investing more at a time when markets are close to all-time high levels. SIPs help the investor average his cost over a period of time, fetching more units when prices are low and fewer units when prices are high. In the current scenario, the SIP investor will accumulate units at higher prices, which will push up his average cost of purchase. Therefore, some investors want to sit out and wait for the markets to correct. Should you also stop your ongoing SIPs to avoid buying at high prices? 

No, say investors with long-term experience in the market. Over the years, these individuals have learned to ignore the market noise and continue their SIPs month after month. This unwavering discipline has helped them build an impressive corpus, letting them achieve key goals in life or putting them within touching distance of the same.We discussed critical aspects of how to make SIPs work for you. 

Returns depend on how investors treat SIPs 
Regular investors earned more than those who lost their nerve or tried to time the market. 

HOW TO MANAGE MONEY AFTER RETIREMENT

Retirement is not an event but a long phase in your life that can last up to 35 years. During those decades, inflation will cut down the value of your savings ruthlessly. If your savings do not earn enough, then you are going to run out of them within your lifetime. 

Nothing can be worse than a long period of old age where you are gradually losing prosperity and then eventually entering poverty. 

And yet, all around you, you can see any number of senior citizens to whom this is happening. So how can you prevent this from happening to you? The first part, which I wrote about in detail last week, is to save enough during your working years and then invest the savings in equity -backed mutual funds.

The second part, which I’ll discuss today, is how to derive income from these savings after you have retired. If you have understood what I’ve been saying about inflation, then the basic requirement is self-evident: you should spend only that part of your investment returns that exceed the inflation rate. This is another way of saying that you must preserve the value of your principal. 

However, the single most important thing to understand in this whole business is that you must reserve the real, inflation-adjusted value of your principal, and not just the nominal face value. 

So how do you do this? Let’s take a simplified example. Suppose you retire today with say Rs 1 crore as your retirement savings. You place it in a bank fixed deposit. A year later, it is worth Rs 1.07 crore. So you have earned Rs 7 lakh, which you can spend, right? Not so fast. Assuming a realistic inflation rate of 5%, if you want to preserve the real value of your principal, you must leave Rs 1.05 crore in the bank. That leaves Rs 2 lakh that you can withdraw to spend over an year, which is Rs 16,666 a month. 

Is that enough? For a middle class person, surely not. It could be a little worse with some banks, and it could be a little better for something like the Post Office Monthly Income Scheme, but basically, this is it for any supposedly fixed income asset class. The interesting thing is that this calculation does not change even when interest rates rise because inflation and interest track each other quite closely. 

It’s actually a publicly declared goal of the RBI (from Raghuram Rajan’s time) that a real (meaning inflation-adjusted) interest rate is 1.5 to 2%. However, the actual rate tends to be lower, especially when compared not to the official inflation rate but the real inflation that you face. 

This means that if you need Rs 50,000 a month, you need Rs 3 crore. Of course, at that level, income tax also kicks in and about Rs 30,000 a year will have to be paid. It’s actually worse, there have been long periods of time when the fixed income interest rate has been below the inflation rate. 

Moreover, the tax has to be paid whether you realise the returns or not. There can be a situation (often is, in fact) when the interest rate barely exceeds the inflation rate and the income tax on the interest is effectively reducing the value of the money. 

The situation is very different in equity-backed mutual funds. Unlike deposits, they are high earning but volatile. In any given year, the returns could be high or low, but over five to to seven years or more, they comfortably exceed inflation by 6-7% or even more. 

For example, over the last five years, a majority of equity funds have returns of 12% per annum or more, some as high as 20%. The returns may have fluctuated in individual years, and that’s something that the saver has to put up with, but the threat of old age poverty does not exist. In such funds, one can comfortably withdraw 4% a year and still have a comfortable safety margin. 

On top of that, there is no income tax. As long as the period of investment is greater than one year, returns from equity funds are completely tax free. This means that to have a given monthly expenditure through equity funds, you need just half the investment that you would in deposits. So for a monthly income of Rs 50,000 a month, Rs 1.5 crore will suffice instead of Rs 3 crore. And no matter how high your savings and expenditure, it’s all tax free. 

I find that a small but growing number of people have begun to understand and appreciate this idea and have started doing it. They tend to be those who have used equity funds as their savings vehicle anyway and are used to the idea of ignoring short-term volatility in the interest of long-term gains. However, the vast majority of Indian retirees are still wedded to the mythical safety that deposits provide and end up facing tragic problems as they grow older. There’s no need for you to be one of them.