Property can be passed to legal heirs by will or through a gift deed. Property received through inheritance is not subject to tax at the time of inheritance but will attract capital gains tax during sale. Matters related to property inheritance in India are governed by personal laws, such as the Indian Succession Act 1925 and the Hindu Succession Act 1956. These laws allow property transfer to legal heirs, such as spouses, children, parents, grandchildren, etc., after death.

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What Is Inheritance Tax?

Assets received as inheritance, either in cash or as physical property, are exempt from taxation under section 56(2) (x) of the Income-tax Act, 1961. Inheritance tax is a type of tax applied to the inheritor if the property is sold in the future. As per taxation rules, the seller of such a property will have to pay a capital gains tax when selling the inherited asset. Furthermore, if the inheritor of such a property earns an income from it in interest or rent, the returns will be taxed annually as per the individual income slabs. The new owner must, therefore, report and pay taxes on income from such a property when filing their annual income tax returns.

Tax On Sale Of Inherited Property

The owner of an inherited property is liable for capital gains tax upon selling the property. Gift tax is exempt for an inherited property, but subsequent sales are taxable under capital gains, which can be long- or short-term, depending on the asset’s holding period. A long-term capital gains (LTCG) tax will apply when the inherited property is sold after two or more years. Short-term capital gains tax will apply when held less than 24 months from the date of acquisition. Also, LTCG is subject to indexation benefits, while STCG is taxed as per income slabs.

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Points To Remember

• All inherited properties are tax-free at the time of inheritance under section 56(2) (x) of the Act, but short- or long-term capital gains tax will apply during its sale.
• Money spent on repairs, improvements, etc., is adjusted when calculating capital gains.
• For capital gain calculation, the property’s holding period is counted from the date the original owner purchased it, not the date of inheritance.
• One can report the sale of an inherited property by declaring capital gains in ITR 2 or ITR 3. In the case of LTCG, the seller will receive indexation benefits.