Do I Need To Pay Tax If I Inherit Shares From My Parents?

Abhinandan Singh, email

I sold shares inherited from my father worth Rs 40 lakh and plan to buy an agricultural land with my brother. What are the tax implications of this transaction? Can I avail tax benefits available under the Income-tax Act, 1961?

In India, inheriting shares from a parent does not attract any tax. Liability arises when they are sold. The acquisition cost is the price at which the owner bought them, while the holding period is the time they held them. Capital gains are taxed as the difference between the sale price and the indexed cost.

Short-term gains (if held for less than 1 year) are taxed at 15 per cent. If held longer, gains exceeding Rs 1.25 lakh are taxed at 12.50 per cent.

Using shares to buy agricultural land does not qualify for capital gains exemption, as Section 54B applies only when land is sold and gains are reinvested. In this case, tax-saving options include investing up to Rs 50 lakh in bonds under Section 54EC or in a residential house under Section 54F. Capital losses can also be set off.

Agricultural income is tax-free, and if the land qualifies as rural agricultural land, its future sale may be exempt.

In joint ownership, the sharing should be defined. Each owner will be responsible for their respective share for any future tax implications.

Suhel Chander CFP®, Handholding Financials

Rajiv Gupta, email

I am 35 years old and planning to buy a house in the next 4-5 years. I have Rs 25 lakh invested in equity mutual funds (MFs) through multiple systematic investment plans (SIPs). Should I continue investing in the same, or shift some amount into debt funds or recurring deposits (RDs) to manage risk?

Since you plan to buy a house in 4-5 years, the strategy should balance growth and capital protection. You currently have Rs 25 lakh in equity MFs via SIPs, supporting long-term growth, but equity markets can be volatile over the shorter period.

You can retain equity exposure as there is time to recover from market swings. However, you can stop fresh equity SIPs and shift to hybrid mutual funds such as balanced advantage and multi-asset allocation funds. Partial redemption from existing equity funds can also be moved to these categories.

When you are about 3 years away from the purchase, reduce equity exposure. Move out of pure equity funds and shift towards debt options. You can stop SIPs in hybrid funds and start SIPs in debt funds or RDs. Suitable options include short duration and low duration debt funds, arbitrage funds, bank RDs, and fixed deposits (FDs).

In the last 12-18 months, focus on capital protection by moving your investments further into debt. This gradual shift helps avoid the impact of a 20-30 per cent market fall near your goal and reduces the risk of emotional decisions.

Uma S. Chander, CFP®, Handholding Financials

Alok Sharma, email

I am 58 years old and retiring in 2 years. I have Rs 70 lakh in Public Provident Fund (PPF) and Rs 20 lakh in MFs. My monthly expenses post-retirement will be around Rs 60,000. Should I move my MF investments to FDs or to schemes like Senior Citizens Savings Schemes (SCSS) upon retirement? Market volatility and inflation concerns me, but I want my savings to grow.

Your situation with Rs 70 lakh in PPF, Rs 20 lakh in mutual funds, and a monthly need of Rs 60,000, the choice between SCSS and a hybrid fund SWP comes down to safety versus growth with tax efficiency.

SCSS is a government scheme that offers around 8.20 per cent interest. It provides quarterly income and safety, but the interest is taxed at slab rate. For 30 per cent slab rate, the return is about 5.70-6 per cent, and around 6.50 per cent at a 20 per cent slab rate, which may not outpace inflation. It comes with a 5 year lock-in, and has an investment limit of Rs 30 lakh.

SWPs from a hybrid MFs combines equity along with debt, offering moderate risk and inflation protection. Such funds can give about 9-12 per cent back in returns in the long term. Withdrawals are taxed as capital gains. Long-term capital gains exceeding Rs 1.25 lakh annually are taxed at 12.50 per cent. Since tax applies to the gains, post-tax income is efficient, with flexible liquidity. A combined approach of SCSS for stable income and SWP for growth can help manage risk, tax efficiency, and long-term sustainability.

Hina Shah CFP®, LUHEM²WEALTH