Summary of this article
Inheritance itself does not trigger income tax.
Sale of inherited property can attract capital gains tax.
Previous owner’s cost and holding period matter.
Inheriting a house or other immovable property from a parent or another family member does not create an immediate income tax liability. However, tax implications arise when that said property is eventually sold. The capital gains from the sale are generally taxable in the hands of legal heirs who sell the said property. The calculation can be different from that of a property purchased directly by the seller, as the tax rules allow the heir to consider the previous owner’s acquisition costs and holding period.
"Inheriting a property that people are already arguing about can be really scary for any family. You do not know what is going to happen. The uncertainty makes people wonder if they will still get the property,” says Vivek Kumar, Advocate, Delhi High Court.
When a property is inherited, the cost of acquisition for the heir is generally taken as the cost at which the previous owner acquired the property, with additional eligible expenses that were incurred on improvements. The heir’s share of the sale proceeds, acquisition cost, improvement expenses and eligible transfer-related expenses are considered while calculating the taxable gain. For properties which are older, there are additional rules: if the previous owner acquired the property before April 01, 2001, the fair market value as of that date would be considered as the cost of acquisition.
For any immovable property, the key threshold is about 24 months. If the property is held for 24 months or less, the gain is treated as short-term capital gain under the law. Such gains are generally added to the taxpayer’s income and taxed at their slab rate. On the other hand, if the combined holding period exceeds 24 months, the gain qualifies as a long-term capital gain (LTCG). For property transfers that are covered by the current regime, LTCG is taxed at 12.5 per cent. Therefore, someone who inherits a property held for several years will qualify for long-term capital gains.
What Deductions Are Made Available?
In certain cases, tax liability may be reduced if the seller is qualified for exemptions. Section 54 provides relief on LTCG arising from the sale of a property that is reinvested to buy a new property of residential nature in India. The new purchase can be made within one year before or two years after the sale. If the property is being constructed ground-up, the provision is for three years. The exemption capping is at Rs 10 crore. Where the capital gain does not exceed Rs 2 crore, taxpayers can also exercise a one-time option to invest in two residential properties instead of one.
What Should Heirs And Sellers Remember?
Inheritance itself is not a transfer that is taxable; however, if that inheritance is sold, that can trigger tax responsibilities onto the seller. The property's acquisition cost, improvement expenses, and the previous owner's holding period can become important while deciding the final tax liability.
The heirs of the property must keep all documents related to inheritance, original purchase deeds, records of improvements and other sale-related documents.
