Calculate Capital Gains on Sale of Inherited Property

Calculate Capital Gains on Sale of Inherited Property

In India, the sale of immovable property is taxable in the year of sale. Any immovable property held for more than 24 months is considered a long-term capital asset. In the event of inherited property, the holding period is determined from the date of acquisition by the original owner (deceased person). The taxation on the sale of inherited property differs from the taxation on the sale of purchased property. Estate Tax (also known as Inheritance Tax) is charged on inherited assets. According to section 56(ii) of the Income Tax Act, there is no inheritance tax regardless of the value of the inherited property. However, if the successor decides to sell the inherited property, the capital gains are taxed. 

Price of Property

The price of the property will also be based on the expenses incurred by the original owner. If the property was purchased by the original owner before to April 1, 2001, the cost may be substituted with the property's current fair market value, as long as it does not exceed the stamp duty value on that day. The original owner's or taxpayer's cost of improvement, or capital expenditure, incurred for installing additions or improvements to the property after 1 April 2001 can also be used into the calculation of capital gains in this scenario. The indexation cost of acquisition is computed with the Cost Inflation Index (CII). The years 2000 and 2001 are utilised as the basis year for determining CII. All real estate purchases made before to 2000–2001 are regarded as having a CII of 100. Every year, just before the start of the fiscal year, the government updates and releases the CII. The CII is essential for determining the inflation-adjusted rise in the cost of the property and is used to determine the tax on the sale of inherited property. 

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In 2023, Capital Gains Tax on Sale of Inherited Property

Capital Gains Tax on the property is calculated based on the length of time the initial owner and subsequent inheritor possessed the property. It will be considered how long the initial purchaser and inheritor kept the property. As a result, even if an inheritor only received the estate last year but the original buyer purchased the property five years prior, the inheritor will still be required to pay LTCG tax when selling the inherited property. As a result, the following types of taxes may be imposed: 

  1. Short Term Capital Gains Tax: If a property is held for less than 3 years, STCG is calculated as per the marginal income tax slab of the inheritor and can be up to 30%.

  2. Long Term Capital Gains Tax: If a property is held for more than 3 years, then LTCG of a fixed 20% is applicable. One can get an exemption on LTCG on two grounds: 

  1. One has the option to spend the LTCG within three years of the sale date on new property building or within two years of the selling date on new property acquisition.

  2. The alternative choice is to purchase bonds from the National Highway Authority of India (NHAI) or the Rural Electrification Corporation (REC). These bonds, commonly referred to as capital gain bonds, were made particularly to assist individuals in obtaining LTCG tax exemption.

If the LTCG is not invested by the time the India tax return is due (on July 31), there is a choice to deposit the capital gain in a Capital Gains Account Scheme (not later than the India tax return due date) and then withdraw the money to reinvest in a new residential property within the allotted time (2 years or 3 years, depending on the situation). The remaining amount of the LTCG will be subject to tax if it is not fully reinvested or put into the scheme.

Also read: Can Homebuyers take Legal action against builder for delay in possession of Property?

Steps to Calculate Capital Gains: 

To calculate capital gains, one needs to be aware of the cost of acquisition and indexation, then the cost of the property in itself. To calculate the capital gain, the cost at which the previous owner (not the inheritor) got the property is considered the acquisition cost. On the basis of the data updated till 2001, the price is decided.  

Hence, sale of inherited property requires tax considerations and should be structured effectively.

Also Try:  consult a property lawyer