Inheritance tax, also known as estate tax, is a financial obligation imposed on the earnings derived from one’s ancestral property. In 1986, India took a significant step towards fostering a more favorable financial environment by eliminating the inheritance or estate tax.
Therefore, it is important to note that there is no tax liability incurred upon receiving an inheritance. When it comes to inheriting property, it’s important to understand the financial responsibilities that come along with it.
In this case, the new owner of the inherited property will be responsible for paying the annual tax categorized as ‘Income from House Property’. When it comes to self-occupied property, the annual value is deemed to be zero.
However, for properties that are rented out, the annual value is equivalent to the annual rental income received. When it comes to selling an inherited property, it’s important to be aware of the potential capital gains tax liability while income tax e-filing falls on the shoulders of the property owner.
Tax Liability on Inherited Assets
According to the provisions outlined in the Income Tax Act of 1961, individuals are not subject to taxation on inherited assets while income tax e-filing, regardless of whether they are movable or immovable in nature.
However, it is important to note that a tax will be imposed in the event that the new owner chooses to sell the property. When it comes to movable assets such as mutual funds, gold, shares, and the like, it’s worth noting that the new owner is not subject to any tax obligations.
Capital Gains Tax on Sale of Inherited Property
When you sell inherited property and earn income from it, the amount is considered as Long Term Capital Gains (LTCG). This type of income is subject to a tax rate of 20 percent.
The duration of ownership for inherited property is determined starting from the date when the previous owner acquired it. The specific date on which the assessee acquired the property through inheritance does not play a role in determining the duration of ownership.
The capital gain is subject to a tax rate of 20.8% (including cess) when indexation is taken into account. If the property is owned for less than 24 months from the acquisition date, any capital gain is considered a Short Term Capital Gain (STCG) and is subject to taxation based on the applicable slab rate.
Filing ITR for Inherited Property
When the new owner of an inherited property files their income tax returns, they are required to declare any additional income and fulfill their tax obligations accordingly. The individual who possesses the inherited property is responsible for paying the capital gains tax when they decide to sell it.
While any asset received as an inheritance is exempt from gift tax, it’s important to note that the amount obtained from selling the inherited asset is not exempt and is subject to taxation.
Exemptions to Capital Gains Tax
In order to reduce the burden of capital gains tax, Section 54 of the Income Tax Act of 1961 provides an opportunity for the new property owner to be exempted from this tax. This exemption can be obtained by reinvesting the proceeds from the sale into another property of equal or greater value.
In the event that the property purchased is of lower value, it is necessary to deposit the remaining balance into the Capital Gains Account Scheme, 1988, before the deadline for income tax e-filing.
Conclusion
When it comes to inherited property in India, there is no tax imposed at the moment of inheritance. Nevertheless, the individual who has recently acquired ownership of the inherited property is responsible for paying the yearly tax categorized as ‘Income from House Property’.
The individual who owns the inherited property is responsible for paying the capital gains tax when they decide to sell the property. In order to minimize the capital gains tax, the new owner can qualify for an exemption by reinvesting the proceeds from the sale into another property that is of equal or greater value.
Also read: Individual and Business Tax Credits: An Explanation
