Sale of immovable property in India is taxable during the year of the sale. A long term capital asset is considered to be any immovable property held for a period of more than 24 months, and in case of inherited property, the holding period is calculated from the date of the acquisition by the original owner (deceased person). Taxation on the sale of inherited property is varied from that of a property obtained through purchase. When an asset is inherited, Estate Tax (also known as Inheritance Tax) is levied. Section 56(ii) of the Income Tax Act states that there is no inheritance tax applied irrespective of the cost of the property inherited, but in case the heir decides to sell the inherited property, the capital gains are taxed.
Price of Property
The price of the property will also be calculated in relation to the original owner's expenses. If the property was purchased by the original owner before 1 April 2001, the cost may be replaced with the fair market value, provided that it does not exceed the stamp duty value on that day. The original owner or taxpayer's cost of improvement, or capital expenditure, expended for adding additions or improvements to the property after 1 April 2001 can also be taken into account for calculating capital gains in such a transfer. The indexation cost of purchase is calculated using the Cost Inflation Index (CII). For computing CII, the years 2000–2001 are used as the base year. 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.
Capital Gains Tax on Sale of Inherited Property
Capital Gains Tax on the property are divided on the basis of the length of time for which the initial owner and the subsequent inheritor held the property with them. It will be taken into account how long the initial purchaser and the inheritor held onto the property. Therefore, even if an inheritor only received the estate last year but the original buyer made the purchase five years prior, the inheritor will still be liable for paying LTCG tax when selling the inherited property. Accordingly, the following kind of tax can be levied:
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%.
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:
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.
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.
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.