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Understanding Inherited Property

Inherited property refers to assets transferred from ancestors, typically a father, grandfather, or great-grandfather. However, not all inherited assets qualify as ancestral property under tax laws. Properties inherited from maternal relatives or through other relations do not fall under this category.

Before 2005, only male members had rights over ancestral property. A legal amendment later ensured equal inheritance rights for female heirs.

Is Inheritance Tax Applicable in India?

India does not levy an inheritance tax. However, any income generated from inherited property—such as rental income—is taxable in the recipient’s hands. Additionally, capital gains tax applies upon selling inherited property.

Modes of Inheritance

Inheritance in India generally occurs through the following methods:

1. Will-Based Inheritance

A legal will dictates the distribution of assets after the owner's demise. Key aspects include:

• Legal validity: Must comply with required legal formalities.
• Role of executor: Ensures asset distribution as per the will.
• Probate requirement: Court verification may be necessary for authentication.

2. Nomination-Based Inheritance

Certain financial assets allow nomination, where a designated individual inherits them. Examples include:

• Bank accounts
• Insurance policies
• Mutual funds
• Retirement savings

3. Joint Ownership Inheritance

When assets are jointly owned, the surviving owner automatically inherits the deceased's share without probate. This is common for:

• Real estate
• Bank accounts
• Business ownerships

Tax Implications on Selling Inherited Property

The sale of inherited property is subject to capital gains tax, classified as follows:

1. Long-Term Capital Gains (LTCG)

• Applicable if the property is held for more than 24 months before sale.
• Taxed at 20.8% (including cess) after indexation.

2. Short-Term Capital Gains (STCG)

• Applicable if the sale occurs within 24 months of inheritance.
• Taxed as per the individual’s applicable income tax slab.

Capital Gains Calculation on Inherited Property

Since inherited property is acquired without cost, the original owner's acquisition price is used for capital gains computation.

Formula for Indexed Cost Calculation:

Indexed Cost of Acquisition = (Original Purchase Price × CII of Sale Year) ÷ CII of Purchase Year

Example Calculation:

If a property was purchased in 2005 for Rs. 75 lakh, inherited in 2012, and sold in 2016 for Rs. 1.8 crore:

Indexed Cost = Rs. 75 lakh × (CII of 2016 ÷ CII of 2005) = Rs. 75 lakh × 264 ÷ 117 = Rs. 1.69 crore

Thus, the taxable capital gain is Rs. 11 lakh (Rs. 1.8 crore - Rs. 1.69 crore).

Ways to Reduce Capital Gains Tax on Inherited Property

1. Investing in Capital Gains Bonds

• Up to Rs. 50 lakh can be invested in bonds issued by REC, NHAI, IRFC, or PFC within six months.
• Investment locks funds for five years, exempting gains from taxation.

2. Reinvesting in Residential Property

• Purchase a new house within one year before or two years after selling.
• Construct a house within three years of sale.
• Exemption available under Section 54 for up to Rs. 2 crore.

3. Utilizing the Capital Gains Account Scheme

• Sale proceeds can be deposited in a government-approved capital gains account.
• Funds must be used for property reinvestment or infrastructure bonds within the specified timeframe to claim exemption.

Budget 2025 Updates: Tax Reforms & Reliefs

1. Increased Income Tax Exemption

• No income tax for annual income up to Rs. 12.75 lakh under the new tax regime.
• Section 87A rebate limit raised to Rs. 12 lakh, benefiting middle-class taxpayers.

2. Revised Tax Slabs (Effective April 2025)

3. Extended ITR-U Filing Window

• Taxpayers can now update past income tax returns within four years, instead of the previous two-year limit.

Conclusion

While inheritance itself is not taxable in India, capital gains tax applies when inherited property is sold. Proper planning, accurate gain calculation, and utilizing available exemptions can help reduce tax liability. Seeking professional advice can ensure tax compliance and optimal tax-saving strategies.

If you have any further questions or need assistance, feel free to reach out to us at admin@ushmaassociates.com or info@nricaservices.com, or contact us via call/WhatsApp at +91 9910075924. 

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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.