Selling ancestral property: Why is the fair value as on April 1, 2001 necessary for capital gains calculation?

If you have been reading about the taxation of gains from selling ancestral properties, you may have come across the suggestion to consider the fair value of the property as on April 1, 2001, as the cost of acquisition. Why is this date so important? And what if you don't pay the capital gains tax? Today's Q&A answers these questions.

In order to compute long-term capital gains for the assets acquired before April 1, 2001, the income tax laws provide that the taxpayer has the option to take the fair market value of the property as on 1 April 2001 as his cost. This is an option, and it is not mandatory for the taxpayer to adopt the fair market value on April 1, 2001 as his cost in all the cases, and he can opt for taking the actual cost of the capital asset for computing the long-term capital gains.

The option to take the fair market value applies not only to inherited properties but also to all the assets which were acquired for consideration prior to that date.

Please note that for the inherited properties, which were acquired for a consideration after April 1, 2001, the option to take the fair market value as on April 1, 2001 is not available.

Before introducing this date, earlier the taxpayer had the option to take the fair market value as on April 1, 1980. This was done with the object to give the taxpayer relief in respect of properties acquired long back for which it is difficult to find out the fair market value and also to compensate for price rise in the capital asset due to inflation

As per the income tax laws, the registration offices are required to report details of all the sale/purchase transactions of immovable properties above ₹30 lakh to the income tax department. Since PAN/Aadhaar are mandatory for registration of all the property purchase/sale transaction over ₹10 lakh, the data submitted by the registrar are collated based on PAN/Aadhaar number. All such transactions are made available to the tax payers through their Annual Information Statement (AIS).

If you do not pay capital gains tax on the sale of the ancestral property, the income tax department will in all probability be able to detect this and issue you a notice. If you do not pay tax on such capital gains, in addition to the tax and interest, the income tax department can levy 200% of the tax amount as a penalty for concealment of income after giving you a proper opportunity of being heard. So it is in your own interest to pay capital gains tax on the sale of ancestral property.