When you have inherited a property from your ancestors then it is not taxable for the recipient at the time of inheritance. However, when the inheritor decides to sell the property, capital gains tax is applicable on the sale. Inherited assets can include both immovable property (like real estate) and movable assets such as gold, shares, deposits, and more. However there are certain exemptions to the above. In this article, we will discuss the tax implications involved in the sale of inherited property.
What is Inherited Property?
The property passed down or transferred to the legal heirs of a deceased person is called inherited property. Such property received by the legal heir is said to be their inheritance. Legal heirs of a deceased person can be a spouse, children, mother, grandchildren etc. In India, the rules regarding property inheritance are regulated by personal laws like the Hindu Succession Act 1956 and the Indian Succession Act 1925. Legal heirs can inherit property through a will or under the law of succession. A person can also inherit property through a gift deed executed by a family member.
What is Inheritance Tax?
Inheritance tax is the income tax liability in the hands of the recipient if he has received any assets through inheritance/will. However, in India, as per section 56(2)(x), any money or property received under a will or by way of inheritance is not taxable.
Taxation on income derived from an inherited property can be viewed as income tax imposed on an individual due to his/her inheritance. In many cases, inherited property provides additional income to the new owner, such as interest, rent, etc. As a result, the new owner must declare this additional income while filing income tax returns and pay taxes on it.
Taxation on Inherited Property
In India, the inheritance or estate tax was abolished in 1986. Thus, there is no tax liability at the time of inheritance as per section 56(2)(x). However, an owner of inherited house property is liable to pay taxes on income which is generated from the inherited assets and when he sells those inherited assets.
Example: If you have received a house property in inheritance and you receive rental income. You will be liable to pay taxes on the same. Similarly, if you sell the house during the year it will be taxed under the head “Capital gains”
Taxation on Selling Inherited Property
The owner of the inherited property is liable to pay the capital gains tax upon the sale of the inherited property. Any asset received as an inheritance is exempted from gift tax, but the amount received from the subsequent asset’s sale is not exempted and is taxable under the category of capital gains.
Capital gains can be long-term or short-term, depending on the period for which the asset was held. If the inherited property was owned for two years or more, the income received from its sale is considered a Long Term Capital Gain (LTCG).
