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Selling a house received through inheritance can create a sizeable tax liability, but the gain is not calculated from the date on which the heir became its owner.
There is no capital gains tax merely because a person inherits a property. Tax arises when the heir sells it. The sale price is adjusted for the permitted cost and expenses to arrive at the capital gain.
How The Holding Period And Cost Are Determined
For land or a building to be treated as a long-term capital asset, it must have been held for more than 24 months. In an inherited property, the previous owner’s holding period is added to that of the heir.
“The first thing people get wrong is assuming the clock starts when the property came into their name. It doesn't. Under Section 2(42A), when you inherit a house, you inherit the previous owner's holding period along with it,” says Aarjav Jain, executive director and NRI tax expert, Dinesh Aarjav and Associates Chartered Accountants.
Thus, if a parent bought a house in 1995 and the child inherited it in 2024, the holding period begins in 1995. Most inherited houses consequently produce long-term capital gains when sold, though the dates should still be checked.
The heir’s cost of acquisition is generally the amount paid by the previous owner. It is not treated as zero simply because the heir paid nothing. Where the house was acquired before April 1, 2001, its fair market value on that date may be adopted instead of the original cost, subject to tax rules.
Costs of qualifying improvements made by the previous owner or the heir may also be considered. If the April 1, 2001 value is used, only eligible improvements after that date are relevant. Bills and bank records should be preserved.
Expenses incurred wholly and exclusively for the sale, such as brokerage and transaction-related legal fees, may be deducted from the sale consideration. Any claimed expense must have been borne by the seller and supported by evidence.
Tax Rate And Ways To Claim An Exemption
Long-term gains from property transferred on or after July 23, 2024 are generally taxed at 12.5 per cent without indexation, apart from surcharge and cess. A resident individual or Hindu Undivided Family (HUF) selling land or a building acquired before that date is protected where tax under the new rule exceeds the amount calculated at 20 per cent with indexation. Both calculations should be run where this relief applies.
Section 54 can reduce the liability if long-term gains from a residential house are reinvested in another residential house in India. It may be purchased within one year before or two years after the sale, or constructed within three years. The exemption is linked to the amount reinvested and is subject to the Rs 10 crore ceiling.
Section 54EC is another route. Up to Rs 50 lakh may be invested in specified bonds within six months of the transfer, subject to a five-year lock-in.
“The mistake I see most often is people missing the reinvestment deadline because they assumed they had longer than they actually did, so I always tell families to fix the timeline the day the sale closes, not months later,” says Jain.
FAQs
1. Is inherited property taxed when it is received?
No. Capital gains tax arises only when the heir sells the property, not when it is inherited.
2. How is the holding period of an inherited house calculated?
The previous owner’s holding period is added to the heir’s holding period to determine whether the gain is short- or long-term.
3. How can an heir reduce capital gains tax after selling the house?
The heir may claim eligible costs and sale expenses or seek exemption by reinvesting under Section 54 or Section 54EC within the prescribed deadlines.
