Understand the Tax Treatment of Inherited Property

Understand the Tax Treatment of Inherited Property

Understand the Tax Treatment of Inherited Property

Taxation Applies Only on Sale of Inherited Assets

Current Position in India

• India does not have inheritance tax (estate duty was abolished in 1985).Hence, there is no tax liability at the time of inheritance. India does not levy inheritance tax. Assets received through inheritance are not taxable under the Income Tax Act, 1961. When you inherit a property (through will, succession, or gift from specified relatives), there is no tax at the time of inheritance.
• Tax arises only when the inherited asset is sold or generates income (rent, dividends, etc.). Movable Assets (e.g., shares, gold, mutual funds)

• No tax on inheritance.
• Tax applies only when sold.
• Gains are taxed based on asset type and holding period.

• There is no inheritance tax in India. Assets passed on to legal heirs are not taxed at the time of inheritance. Tax arises only on subsequent sale or income generated from those assets.
• NRIs can inherit property in India. There is no tax at the time of inheritance. However, if they sell the inherited property, capital gains tax applies, and TDS may be deducted. They can also use DTAA provisions to avoid double taxation.
• Any life insurance payout received by the nominee on the death of the insured is fully tax-exempt under Section 10(10D) of the Income Tax Act, subject to prescribed conditions.
• if the heir decides to sell inherited assets (shares, property, etc.), capital gains tax applies. The original owner’s cost and holding period are considered for calculating tax.
• currently there is no inheritance or estate tax in India. Inherited property or assets are tax-free at the time of transfer.
• Since India does not levy inheritance tax, there is nothing to avoid at present. However, you must pay taxes on income earned from inherited assets (like rent, dividends, or capital gains on sale).
• Unlike many countries around the world that levy an inheritance or estate tax, India currently has no inheritance tax. This means that if you inherit property or assets from a deceased individual, you are not liable to pay tax at the time of inheritance. However, tax arises later in two situations:

• If you sell the inherited asset, capital gains tax will apply.
• If the inherited asset generates income (rent, interest, dividends, etc.), such income is taxable in your hands.

• So, while inheritance itself is tax-free, future income or sale proceeds from the inherited asset are not exempt.

Why the Government May Reintroduce Inheritance Tax

• Wealth Inequality: Over 40% of India’s wealth is held by the richest 1%, compared to a global average of 7%.
• International Precedent: Countries like Japan levy inheritance tax as high as 55%.
• Revenue Generation: Estate duty could bring additional funds for public spending.
• Redistribution: May help reduce wealth concentration across generations.

Tax arises on sale : When you sell the inherited property, you must pay capital gains tax on the profit. When you sell an older inherited property, tax saving on entire sale is usually subject to capital gains tax.

Capital Gain = Sale Consideration – Indexed Cost of Acquisition – Expenses on transfer

Challenges if Reintroduced

• Impact on Family Businesses: Many Indian firms are family-run; estate duty could disrupt succession planning.
• Capital Flight: Wealthy individuals may shift residency or businesses abroad to escape taxation.
• Double Taxation Concern: Assets inherited may already have been subject to income tax or wealth tax during the lifetime of the deceased.
• Administrative Burden: Valuation disputes, compliance complexity, and enforcement would be significant hurdles.

Ownership Methods & Legal Implications

1. Will of Succession : Legal heir inherits as per the will.
2. Nomination : Nominee becomes the rightful owner.
3. Joint Ownership : Surviving owner gets full control.

Types:

• Tenants in Common: Shares passed to legal heirs.
• Joint Tenancy: Equal shares; survivor inherits.
• Tenancy by Entirety: Between spouses; requires mutual consent to sell.

Immovable Property (e.g., land, house)

• Capital Gains Tax applies only when the property is sold.
• Holding period includes the time held by the original owner.
• If held for more than 24 months, it’s considered long-term capital gain (LTCG).

Step-Up Cost (Fair Market Value as on 1st April 2001)

For properties acquired before 1st April 2001, you can take the Fair Market Value (FMV) as on 1st April 2001 (restricted to stamp duty value) as the Cost of Acquisition. This usually reduces the taxable gain significantly.

Apply Indexation

• Indexation allows you to adjust the cost of acquisition and improvement for inflation.
• Indexed cost = Cost × (CII of year of sale ÷ CII of 2001-02).
• This helps bring down the capital gain substantially.

Deduct Eligible Expenses

• Brokerage/commission paid for sale.
• Legal expenses for transfer.
• Cost of improvements (renovations, extensions, etc.) after inheritance or even by the original owner (if documented).

Capital Gains Exemptions (Sections 54 to 54F)

You can claim exemptions by reinvesting the gains:

• Section 54: Reinvest capital gain in a residential property (in India).

• Must purchase within 1 year before or 2 years after sale, or construct within 3 years.
• Only on Long-Term Capital Gain.

• Section 54EC: Invest up to INR 50 lakh in Capital Gains Bonds (NHAI/REC/IRFC) within 6 months of sale. Lock-in: 5 years.
• Section 54F: If you sell a property other than a house (e.g., land) and invest entire net sale consideration in a residential house.

Capital Gains Account Scheme (CGAS)

If you can’t reinvest immediately, deposit the gains in a Capital Gains Account Scheme before the due date of ITR filing (usually 31st July). You can later use it to buy or construct a property and still claim exemption.

Key Tax Rules for Inherited Property

• Cost of Acquisition: You can use the original purchase price or the Fair Market Value (FMV) as of 1 April 2001 (if the property was bought before that date).
• Indexation Benefit: Available for properties bought before 23 July 2024. Helps adjust the FMV for inflation, reducing taxable capital gains. Only resident Indians can claim indexation; NRIs cannot.
• Additional Deductions: You can add costs of improvement and brokerage on sale to reduce taxable gains. If FMV of 1 April 2001 is used, only improvements after that date are allowed.

Example Comparison

Property Details:

• Bought by father in 1998 for INR 10 lakh
• FMV on 1 April 2001: INR 20 lakh
• Sold by son in March 2025 for INR 1.2 crore
• Brokerage: INR 2 lakh

Option 1: Without Indexation

• Capital Gains = INR 1.2 crore − INR 20 lakh − INR 2 lakh = INR 98 lakh
• LTCG Tax @12.5% = INR 12.25 lakh

Option 2: With Indexation

• CII for FY 2001–02 = 100
• CII for FY 2024–25 = 363
• Indexed FMV = INR 20 lakh × (363/100) = INR 72.6 lakh
• Capital Gains = INR 1.2 crore − INR 72.6 lakh − INR 2 lakh = INR 45.4 lakh
• LTCG Tax @20% = INR 9.08 lakh

Tax Saved: INR 3.17 lakh (excluding surcharge and cess)

 

Tax on Subsequent Sale of Inherited Property : Once you inherit a property, you become its legal owner. If you later sell it, the capital gain or loss will accrue to you as the heir.

Holding Period : For capital gains classification:

• The holding period of the deceased is also counted along with your own.
• If the total holding period exceeds 24 months, the gain is treated as Long-Term Capital Gain (LTCG); otherwise, it is Short-Term Capital Gain (STCG).

Example

Mr. Sri Ram inherited a property from his father in 2019. His father purchased it for INR 28,000 on 11 Nov 2004, and it was sold for INR 3,80,000 on 20 Sep 2024.

• Since the combined holding period (father + heir) exceeds 24 months, it is LTCG.
• LTCG is taxable at 12.5% without indexation or 20% with indexation (plus surcharge & cess).
• The cost of acquisition will be the cost incurred by the original owner (i.e., INR 28,000).

7. Double Taxation Relief for NRIs

If you are an NRI and selling inherited property in India:

• TDS @ 20%+ applies on sale proceeds.
• Apply for Lower/Nil TDS certificate (Form 13) before sale to avoid excess deduction.
• Use DTAA benefits to claim tax credit in your resident country.

• For very old properties, always get a registered valuer’s report to maximize FMV as on 01.04.2001, which lowers your taxable gain.
• Summary of Tax-Saving Tips : Use FMV as of 1 April 2001 for older properties. Apply indexation to reduce taxable gains. Include brokerage and improvement costs. Resident Indians benefit more due to indexation. Tax applies only on sale. & No indexation benefit for NRIs.

Tax-Saving Tips

• Use Fair Market Value (FMV) as of 1 April 2001 for older properties.
• Apply indexation to reduce taxable gains.
• Claim Section 54 exemption by reinvesting in another residential property.
• Use Capital Gains Account Scheme if reinvestment is pending.

• No inheritance tax in India — only capital gains tax applies on sale of inherited property.

Future Possibility: If estate duty is reintroduced, it could alter how inheritance is taxed, but would require careful policy design to avoid hurting family businesses and causing double taxation.

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The information / articles & any relies to the comments on this blog are provided purely for informational and educational purposes only & are purely based on my understanding / knowledge. They do noy constitute legal advice or legal opinions. The information / articles and any replies to the comments are intended but not promised or guaranteed to be current, complete, or up-to-date and should in no way be taken as a legal advice or an indication of future results. Therefore, i can not take any responsibility for the results or consequences of any attempt to use or adopt any of the information presented on this blog. You are advised not to act or rely on any information / articles contained without first seeking the advice of a practicing professional.