Capital Gain tax on inherited property

capital gain tax on inherited property
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Capital Gain tax on inherited property

Overview

When a person receives a property by inheritance or gift, there is no tax payable on inheritance. However, if he plans to sell the property obtained by way of inheritance from his father/forefathers, the basic question arises on how to compute the capital gain tax on it.

The Income Tax Act, 1961 has laid down certain rules regarding computation of capital gain tax on inherited property or property obtained by will or by succession.

Click here to read all the important aspects to be kept in mind while making a WILL

Period of holding

In case of an inherited property, the determination of the Long-term or Short-term capital gains depends on the holding period of the previous owner. In other words, to determine the period of holding of the asset, the date of acquisition of the previous owner who bought the asset should be considered. If the previous owner acquired the asset 24 months before the date of sale, then it will be considered as Long Term. Else the same will be considered as short term.

 

Cost of acquisition

As mentioned in Section 49 of the Act, when the capital asset is acquired under a will or by succession or inheritance, the cost of acquisition of the asset shall be deemed to be the cost of acquisition of the previous owner. This cost will be increased by the cost of any improvements/repairs etc born by the previous owner or the present owner of the asset.

Indexation benefit

Similarly, to compute the indexed cost of acquisition, the original date on which the previous owner acquired the asset otherwise than by inheritance or gift should be considered. As mentioned in Budget 2018, if such asset is acquired before 2001, then the fair value as on 1.4.2001 should be considered as a base and index value as on that is considered as 100.

In nutshell, the Capital Gain = Sale Consideration Less indexed cost of acquisition of the previous owner Less cost of improvement less incidental cost of sale if any.

Question: I want to sell my property acquired on inheritance from father who had acquired it in inheritance from his father (my grandfather). What should be the cost of acquisition in this case?

Solution: Sometimes the property in question can be old and might be passed on to generations e.g an old bungalow or property. In that case, the cost of acquisition shall be the cost at which the asset was obtained by the original owner who has obtained it otherwise than by inheritance/gift should be considered. Such cost can be increased by the cost of improvements done by previous owners as well as you.

It is sometimes difficult to compute the cost of acquisition of the original owner. In that case, if the property is older than 2001 the fair market value of the property as on 1.4.2001 should be considered. It is advisable to consult a professional valuer to determine such value.

This cost of acquisition will be increased by the indexation benefit as mentioned above.

Question: If I sell my ancestral property received in inheritance in India, am I liable to TDS?

Solution: Yes. Effective June 2013, the buyer is required to deduct 1% of the total sales consideration before making payment to the seller. A seller can claim this TDS as a refund in case he incurs a Capital loss.

Assuming that you are an NRI and the property held is long-term, then  20% tax plus applicable surcharge and education cess will be deducted by the buyer on the taxable long-term gains. Similarly, in case of short-term capital gains, 30%  tax plus applicable surcharge and education cess will be deducted.

Question: What are the exemptions available to avoid LTCG tax on inherited property?

The long-term capital gains will be exempt if it is re-invested in the specified deposits or properties within the specified time. Please click here to know more about the same.

 

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About CA Janhavi Phadnis 78 Articles
Chartered Accountant and financial consultant. She has worked with corporates for 14 years with expertise in Forex-Treasury, Accounting, and Corporate Tax. She can be contacted at info.financepost@gmail.com

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