What Are the Tax Implications of Selling Inherited Property?

Selling inherited property in India can have specific tax implications, particularly in relation to capital gains tax. While there is no tax on receiving inherited property, the sale of such property triggers capital gains tax based on the property's value at the time of inheritance. The tax treatment differs based on how long the property was held and how it is classified under the Income Tax Act.

Tax Implications of Selling Inherited Property:

Capital Gains Tax: When an inherited property is sold, the seller is liable to pay capital gains tax on the profit made from the sale. Capital gains tax is calculated based on the difference between the selling price and the cost of acquisition. However, there are specific provisions regarding inherited property.

Long-Term Capital Gains (LTCG):

If the property was held for more than 24 months (for real estate) or 36 months (for securities), the sale is considered a long-term capital gain. In this case, LTCG tax applies, which is 20% with indexation benefits for real estate (or 10% without indexation for listed securities).

Short-Term Capital Gains (STCG):

If the property is sold within 24 months (for real estate) or 36 months (for securities), the sale is considered a short-term capital gain, and the applicable tax is charged at the regular income tax rate.

Cost of Acquisition:

For inherited property, the cost of acquisition is not the amount paid by the deceased, but rather the fair market value (FMV) of the property as on the date of the deceased’s death. This value is used to calculate the capital gains when the property is sold.

For example, if an inherited property is sold for ₹50 lakh, and the FMV at the time of inheritance was ₹40 lakh, the capital gain would be ₹10 lakh (selling price minus the FMV).

Indexation Benefit:

One of the most important benefits available for the sale of inherited property is indexation. This refers to adjusting the purchase cost of the property based on inflation, as measured by the Cost Inflation Index (CII).

Example: If the property was inherited in 2010, the CII for 2010 can be used to adjust the cost of acquisition. This reduces the taxable capital gain, as the adjusted acquisition cost is higher than the original FMV, thus lowering the profit that is subject to tax.

Indexation is available only for long-term capital gains. This allows you to account for inflation and reduce the amount of tax you need to pay on your gains.

Exemptions:

Section 54:

If the inherited property is a residential property, the seller may be eligible for an exemption under Section 54 of the Income Tax Act if the capital gains from the sale are used to purchase a new residential property within a specific time frame. This exemption can help reduce or eliminate the capital gains tax on the sale of inherited property.

Section 54F:

This section allows for an exemption from capital gains tax if the sale proceeds are used to buy a residential property, subject to certain conditions.

Agricultural Land:

Agricultural land, under certain conditions, may be exempt from capital gains tax if it qualifies as agricultural property and is sold in a manner consistent with the Income Tax Act.

No Inheritance Tax:

In India, there is no inheritance tax levied on the transfer of property after the death of the original owner. The recipient of the property (heir) does not have to pay any tax on the value of the property received, though tax implications arise when the property is sold.

Reporting Requirements:

Taxpayers must report the sale of inherited property and the corresponding capital gains in their income tax returns. The details of the property’s sale, including the FMV at the time of inheritance, the sale price, and the capital gains calculation, should be properly disclosed.

Example:

If an individual inherits a house worth ₹50 lakh from a deceased relative, and the fair market value of the house at the time of inheritance is ₹40 lakh, and later the person sells the house for ₹60 lakh, the capital gain would be calculated as:

Sale price: ₹60 lakh

Fair market value at the time of inheritance: ₹40 lakh

Capital gain: ₹60 lakh - ₹40 lakh = ₹20 lakh

If the house is sold after more than 24 months, it will be treated as a long-term capital gain, and the individual may apply indexation to reduce the taxable gain. If the individual uses the proceeds to purchase another residential property, they may be eligible for an exemption under Section 54.