Smart planning can help reduce or avoid tax liability when selling inherited assets.
Learning about capital gains on inherited property
When you inherit a property from a parent or relative, you don't pay any tax on inheritance. However, when you sell the property inherited, your selling profit is taxed as capital gains tax. It is a long-term capital gain if you owned the property for more than two years, even though it is newly inherited. Cost of acquisition refers to the price paid by the original owner and it has a pro-rata inflation adjustment option when bought before July 23rd 2024.
Applying exemptions to avoid tax
The Income Tax Act provides a range of deductions to counter and even exclude capital gains tax levied on inherited assets.
One of the ways is availing exemption under Section 54 by investing sale proceeds in a newly purchased residential house. You have to buy a new house within two years of sale or build one within three years. Another way is claiming exemption if you bought a house one year prior to sale.
Section 54EC allows you to invest the capital gains in notified bonds, e.g., NHAI or REC bonds, within six months of sale. The bonds are frozen for five years, and the maximum investment is ₹50 lakh.
Section 54F can be invoked where the entire sale consideration and not only the profits is invested in a house property. It is useful when selling non-residential property but want to take the exemption by investing in a house.
Advance planning to lower tax load
Before you sell the inherited property, calculate the indexed cost of acquisition to find the real tax liability. Choose the most suitable exemption by seeking the advice of a tax consultant. Where there are more than one heir, a clear partition deed is to be executed to avoid disputes and claim individual exemptions.
The second option is disposing of the property over various financial years by apportioning the sale between joint holders. This is to enable each of the proprietors to claim the basic exemption limit and other allowances.
Proper planning and right use of exemption can readily avert or even eliminate capital gains tax burden on inherited property, and you can preserve family wealth successfully.
FAQs
Q1. Must I pay tax if I inherit a house?
No, there is no tax on inheritance in India. You are taxed only when you sell the inherited property.
Q2. What if I invest in another property using the whole sale price?
If the consideration of sale is invested in a further residential property, relief under Section 54 or Section 54F can be availed based on the nature of the property being sold.
Q3. Can I transfer inherited property to someone else to avoid tax?
Gift of property is exempt from capital gains tax but the recipient will have to pay tax when he sells that property.
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