Understanding Taxation on Inherited Property

Acquiring property from ancestors is a common occurrence, but understanding its tax implications is crucial. Properties passed down from fathers, grandfathers, and great-grandfathers are considered inherited assets, with some exceptions. The Income Tax Act lays out various provisions regarding the taxation of such property sales. This article provides a comprehensive guide to the taxation of inherited property.

Updates from Budget 2025

The Union Budget 2025-26 introduces new tax slabs under the revised income tax framework. No tax is applicable on annual income up to ₹12.75 lakh. With an increased Section 87A rebate limit from ₹7 lakh to ₹12 lakh, middle-class taxpayers benefit significantly. Additionally, a standard deduction of ₹75,000 is available for salaried individuals.

New Tax Slab Structure (Effective April 1, 2025)

Additionally, taxpayers now have up to four years to file an updated Income Tax Return (ITR-U).

Definition of Ancestral/Inherited Property

A property is deemed ancestral if inherited from the following paternal ancestors:

Any property received from maternal ancestors or other relatives does not qualify as ancestral under the Income Tax Act, 1961. Prior to 2005, only male descendants had inheritance rights; however, post-2005 amendments grant equal rights to female heirs.

Understanding Inheritance Tax in India

Inheritance tax applies to income generated from inherited properties, such as rental earnings. The tax obligation arises when the inheritor generates income from or sells the inherited asset. This tax is levied on legal heirs, including children and grandchildren.

Methods of Inheritance

Inherited assets can be passed through different mechanisms, including:

1. Will-Based Succession

A legal document wherein the property owner specifies the beneficiaries and appoints an executor to ensure smooth asset distribution.

2. Nomination-Based Inheritance

A designated nominee inherits specified assets such as bank deposits and insurance policies, ensuring direct transfer without probate.

3. Joint Ownership Transfer

Jointly owned assets automatically transfer to the surviving owner, bypassing legal proceedings.

Taxation of Ancestral Property Under the Hindu Succession Act

Inherited property does not attract tax at the time of transfer. However, tax liability arises upon its sale, where capital gains tax is levied based on the holding period.

Taxation on Selling an Inherited Property

• Long-Term Capital Gains (LTCG): If the property is held for more than 24 months, it is taxed at 20.8% (including cess) with indexation benefits.
• Short-Term Capital Gains (STCG): If sold within 24 months, it is taxed as per the individual’s income tax slab.

Comparison of LTCG & STCG Rates (2023-24 vs. 2024-25)

How to Compute Capital Gains on Inherited Property?

Upon selling inherited property, the capital gains tax is determined as follows:

Formula for Indexed Cost Calculation:

Cost of Acquisition × (CII of Year of Sale ÷ CII of Year of Acquisition)

Example Calculation:

A property bought in 2005 for ₹75 lakh was inherited in 2012 and sold in 2014 for ₹1.8 crore. Using CII:

Key Considerations:

• The holding period starts from the original owner’s purchase date, not the inheritance date.
• Major renovations post-April 2002 are included in capital cost calculations.
• If acquired before April 1, 2001, fair market value as of that date can be used.

How to Save Capital Gains Tax on Inherited Property?

Ways to minimize capital gains tax liability:

1. Investment in Specified Bonds

• Invest in REC, NHAI, IRFC, or PFC bonds within six months of sale.
• Maximum exemption: ₹50 lakh per financial year.

2. Purchase or Construction of a New Property

• Utilize sale proceeds to buy a new home within one year before or two years after sale.
• Alternatively, construct a new house within three years.
• Maximum exemption: ₹2 crore (applicable for up to two properties).

3. Capital Gains Account Scheme (CGAS)

• Deposit gains in a designated capital gains account with an authorized bank.
• Funds must be used within two years for property purchase or infrastructure bonds.

Failing to reinvest within the stipulated time results in taxation of the gains.

Conclusion

Understanding the taxation of inherited property is essential for effective financial planning. Properly managing capital gains tax through investment strategies and exemptions can significantly reduce tax liability. Seeking professional guidance ensures compliance with tax regulations while maximizing available benefits.

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Disclaimer: Aim of this article is to give basic knowledge about the topic to people who are not in touch with Indian tax norms. When anybody is dealing with these kinds of cases practically, he shall consider all relevant provisions of all applicable Laws like FEMA/Income Tax/RBI /Companies Act etc.