Thinking of selling the Inherited property? Understand the tax on the sale of Inherited property

Thinking of selling an heirloom such as an inherited property? But before that, it's essential to understand the rules regarding tax on the sale of the Inherited property. According to Indian law of inheritance, there is no Inheritance tax, but it's not the same during the sale of it.

Thinking of selling the inherited property

The property gets passed on from generation to generation. It can be inherited for up to four generations as ancestral property. This passing down of property after the death of a person is known as inheritance. Heirs can sell the inherited property if they choose to do so, but there are many rules and regulations regarding selling inherited property, including the Income Tax implications.

Selling property of any kind is never easy. It is important to understand the tax on the sale of an inherited property in India before taking any important step. When it comes to property inherited by one's father, or grandfather, the inheritance law of property act has its own regulations. 

So what is the Indian Law of Inheritance of property?

When we talk about property inheritance law in India, we refer to the right to inherit property. Right of inheritance is the succession of belongings such as property, titles, debt, or obligations after the death of one person to their successor. You can easily understand the inherited property meaning- 

In simple words, Inheritance is anything acquired by the next successor after the death of its owner. The right to Inheritance is valid for property, titles, debts, and obligations. In India, inheritance is dealt with in two ways. 

A person can get the property inherited by one's father through -

  1. A will (Testamentary succession) 
  2. Self Acquired Property 

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Tax on Sale of inherited property - 

Every inherited property from ancestors does not have tax liability during the instant of inheritance. However, if you are trying to sell the inherited property, the capital gain on the selling inherited property will be taxable. The tax on the sale of inherited property or the inheritance tax is called estate tax. The inheritance of property law in India can be easily understood to avoid any issues that may arise while selling an inherited property.

In India, the inheritance tax on the property does not exist. This law was abolished entirely in 1985. 

Tax on sale of an inherited property in India after acquiring the property, the heir becomes the owner of income coming from a property in case of inherited property. So in simpler words, if you have received the inherited property as a gift, then no tax will be under the Indian law of inheritance of property. But it becomes taxable when you go ahead and sell that inherited property. 

The holding period of the inherited property determines if the capital gain will go under the long term and short term capital gains tax on inherited property. 

Here's the mathematical equation to know the cost of inherited property.

  1. You must be aware of the acquisition cost and cost of indexation. 
  2. The cost of the property owned by the previous owner will be considered as the acquisition cost as the property did not cost anything to the inheritor. 
  3. The year of acquisition for the previous owner will be considered along with the year of sale of the property. 
  4. The updated base years for calculating the tax on the sale of the inherited property have been updated to 2001 from 1981. 

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Tax Benefits

One of the significant tax benefits of inherited property is that one can claim tax exemption on the capital gain from selling the property.

The available options are- 

The first way is by investing the profits in some other property. In these cases, it is applicable only if the capital gain on inherited property is less than Rs. two crores, and the reinvestment is made to the larger of the two residential properties. 

The next option is to use the earned capital to construct a house from inherited property sales. However, this should be done within three years after the selling of property owed by ancestors. 

Another is to invest the gains in capital bonds under the 54EC of the Income Tax Act, 1961.

Tax over the selling of Inherited property 

Although the inheritance tax was abolished in 1986, the owner is liable to pay an annual tax towards the income coming from the property. In such cases, the tax will be calculated based on the yearly value of property decided from rent capital gain. If the property is self Acquired, then this Tax will become nil. 

The owner of the Inherited property will also be liable to pay the tax upon the selling of property Inherited from ancestors, according to the Indian law of inheritance of property in India.

The capital gain or asset from the inherited property will be exempted from the gift. However, the amount of profit from that sale will be taxable under the Indian law of inheritance of property.

If the inherited property is owned for more than three years, it will come under the long term capital gain period. While calculating the holding period, the years of ownership of Inherited property by previous will also be added to the holding period. 

In accordance with that inheritance of property provision, if the inherited property dates back to before April 1,1981, you can substitute the fair market value for the acquisition cost. If it is after 1981, then a price of Rs. 50,000 will be taken as per the acquisition cost. However, there is more to it from the Delhi, Mumbai and Gujarat Highcourt. The taxpayer might be entitled to receive the advantage of indexation from when the previous owner had the house. 

The tax on the sale of Inherited property in India can be substantial at times. One can defer these taxes by using section 54EC of the income tax act 1961. 

More charges can be saved using the tax benefit options discussed above. 

Conclusion - 

The inherited property is not free from taxes. The right to inherit property gives heirs the chance to inherit property from one's father, but the sale of such Property comes with its own set of Taxes and rules. 

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