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Any property that passes on to the receiver, either by the enaction of WILL or by applying rules of succession upon the death of the owner, is considered as inherited property. While until 1985, the receiver of the property had to bear the tax implications on inheriting such property, this 'Estate Duty' was abolished w.e.f 1985. Currently, there is no tax implication on receiving a property.However, there are two provisions under which you may have a tax implication. Let’s see how and when it’s applied.
Tax on the Income from the Property
If the property is on rent at the time of inheritance, the receiver will be liable to pay tax on any rental income that now accrues from such a property.
Tax on the Sale of the Property
Just like the sale of any other immovable property, if and when you decide to sell your inherited property, the capital gains tax will be applicable. Taxation on selling an inherited property will either be LTCG tax or STCG tax depending on the holding period of the property before being sold.If the holding period is less than 2-years, the gains are added to the total income of the seller and taxed as per the relevant income slab of the financial year. And if the holding period is more than 2-years, LTCG tax of 20% plus 3% cess is applied on the indexed gains.However, the rules for calculating the holding duration of a bought property and inherited property differs slightly.The holding duration of a bought property is between the acquisition date and the sale date. However, for an inherited property, the date of acquisition is not the date of inheritance, but the date of acquisition of the original property owner.
Tax Exemptions on Selling an Inherited Property
Just like other properties, you can avail LTCG tax exemptions by;
- Re-investing the Capital Gains in a Residential Property: You have to re-invest either up to 1 year before or 2 years after the sale of such property.
- Undertaking Construction of Another House: You can also re-invest the gains towards paying for the construction of another house within three years from the sale of property and avail exemptions.
- Investing in Capital Gain Bonds: You can invest up to Rs 50 lakh in bonds such as REC (Rural Electrification Corporation) bonds or NHAI (National Highway Authority of India) bonds and avail tax exemptions as well.
FAQS - FREQUENTLY ASKED QUESTIONS
How can I save the tax on the sale of inherited property ?
Inherited property can come with tax benefits, including the ability to claim tax exemption on any gains made from the sale of the property. There are three options available to do so.
The first option is to reinvest the gains in another property. This can be claimed if the long-term capital gains are less than Rs. 2 crores and the reinvestment are made in a maximum of two residential properties located in India. If the gains are more than Rs. 2 crores, the inheritor can still claim the exemption of tax by reinvesting in one property only. It is important to note that these investments must be made within specified time limits, either one year before the sale, two years from the sale, or within three years for an under-construction property.
The second choice is to build a house with the gains within three years of selling the family property.
The third option is to invest the gains in capital gains bonds under Section 54EC of the Income-tax Act, 1961. The total investment limit specified in these bonds is restricted to Rs. 50 lakh per financial year.
Is there a capital gains tax on inherited property in India ?
Yes, there is a capital gains tax on inherited property in India. When an individual inherits a property, they are considered to have acquired it at the fair market value as of the date of the previous owner's death. If the property is sold at a later date, any gain in value will be subject to capital gains tax.
The tax rate for long-term capital gains (i.e. if the property is held for more than two years) is currently 20%, while short-term capital gains (i.e. if the property is held for two years or less) are taxed at the individual's applicable income tax rate.
However, it's worth noting that if the inherited property is sold within three years of the date of acquisition, the sale proceeds will be treated as the cost of acquisition and the individual will not be required to pay any capital gains tax. Additionally, there are some exemptions available for certain types of inherited property, such as agricultural land inherited from a family member. It's always best to consult with a tax expert or a chartered accountant to determine the exact tax implications in your specific case.
What is the holding period for an inherited property ?
When a person inherits property, the period that they hold onto the property before selling it is important for determining the tax implications. The holding period is calculated based on when the previous owner acquired the property, not when the inheritor received it. This means that the length of time the previous owner owned the property is considered to determine if it qualifies for long-term capital gains treatment. The date of inheritance is not relevant in this calculation. It is important to understand this distinction to ensure accurate reporting of taxes and avoid any potential penalties or legal issues.
How does it show the inherited property in ITR ?
Inherited money is a tax-exempt event for both you and your mother. However, any interest earned on that inherited money is taxable and should be reported in your income tax return. You can disclose the inherited money as exempt income in the relevant section of your tax return.
If you have earned income from legal gambling activities, it is treated as speculative business income and requires you to file ITR 3. It is essential to accurately report all your sources of income, including any exempt income, to avoid any legal issues and ensure compliance with tax laws.
Should I sell or keep the inherited property ?
Determining whether to sell or retain an inherited property can be a challenging decision to make. If the property serves as a desirable residence or a valuable asset for real estate investment purposes, retaining it would be a practical choice. However, if the property is situated far from your current location, you have no intention of inhabiting it, or you are not keen on the responsibilities of being a landlord, then selling it may be a more sensible option. Naturally, it would be beneficial to acquire knowledge of the local real estate market. Furthermore, assuming substantial financial obligations associated with the property, such as mortgage payments and utility bills, may necessitate a prompt sale.
What happens to his property if the owner dies without leaving a will ?
According to the Hindu Succession Act of 1965, in the event of an individual's death without a valid will, their property would be inherited by their Class I heirs. If there are no surviving Class I heirs, the property would then be passed down to Class II heirs. However, if both Class I and Class II heirs are not present, the property would be transferred to the Agnates - i.e., relatives related by blood through the father's line of ancestry.
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
