All properties that are passed on from your ancestors are not considered as ancestral property for tax purposes under the Income Tax Act. Ancestral property has been defined as those properties that have been inherited from the immediate male ancestor such as father, grandfather, and great grandfather. Any of the properties that are inherited apart from these three immediate male ancestors are not considered under the Income Tax Act of 1961. When a property is inherited, a person is not levied with tax under the law. However, he may be made liable to pay capital gain tax in case he sells the property.
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Is the sale of an inherited house considered income?
Yes, the income from the sale of inherited property is considered as a sale and is taxable under the head capital gains. The capital gain may be short term or long term on the basis of the duration of ownership in the property before the sale. If the owner has had ownership of the property for a period of fewer than 24 months, then it is considered as short term capital gain and for more than 24 months, it is called long term capital gain. The indexation value for the calculation of Long Term Capital Gain is currently fixed at 20%. The short-term capital gain added to the total income and is deducted based on the income slab it falls under.
Capital gain is not only calculated based on the period you held the property, but the period held by your ancestor is also calculated for the purpose of tax. If the person has only inherited for a period of one year and if the property has been held by the ancestors for 5 years or so, then the person who has inherited the property is also eligible for availing the benefits of long term capital gain.
How much money can you inherit without paying taxes on it?
The ancestral properties that have been inherited after 1985 need not be taxed as the estate tax has been abolished in the year 1985. Even though the inherited property is not taxable, the income received from the inherited property is taxable after the ownership has been acquired. For example, Ramesh inherits his father’s property and earns a rent of Rs. 1, 20,000 every year, he may be charged with the tax on the Rs. 1, 20, 000 that he earns from the property after the ownership has been transferred completely under the income from other sources.
The rule is applicable to properties that are transferred interstate or through a Will. If there is an executor who holds the property, then he is liable to pay tax on the property under section 24 of the Income Tax Act by adding the income to his income tax returns. If there are joint owners for the property, then tax is to be paid by each of them according to their share.
Do you have to pay taxes on inherited property that you sell?
A person may not be required to furnish tax on those properties that he has inherited. However, on the sale of ancestral property, he is liable to furnish the capital gain tax. As already stated above, a capital gain can be taxed based on a short term or on a long term basis based on the duration of holding the property. While calculating the capital gain, it is important to determine the cost of acquisition and for this purpose, the fair market value of the property is taken at the time of transfer of ownership.
It was earlier decided that the properties that have been inherited before April 1st, 1981, are to be charged at a value of Rs. 50,000. However, the high courts of Mumbai, Delhi, and Gujarat unanimously held that the amount that is payable as the cost of acquisition is the amount that is paid by the previous owners at the time of acquiring the property. According to this rule, the person can also avail of the benefits of the indexation from the year in which the previous owner has acquired the ownership of the property.
However, a person can exempt these liabilities of tax payment on the sale of an inherited property under section 54 of the Income Tax Act. According to the section, a person can be exempted from capital gain on a long term basis by investing the entire amount earned on the sale of the property into another property. The investment could be made one year prior to the sale of the property or within two years after the sale of the property. A period of three years is also granted to those that have made their investment in an under-construction property, from the date on which the sale of the property took place.
Section 54 EC of the Income Tax Act of 1961 states that a person can be exempted from capital gain tax if that person invests the amount that he has earned in a certain specific bond such as the National Highway Authority of India (NHAI), Rural Electrification Corporation, etc. The investment needs to be made within a period of six months from the sale of the inherited property.
The amount that is allowed to avoid capital gain is Rs. 50 Lakhs after the budget of 2019. In cases of the person’s inability to reinvest, the person may deposit the amount in a capital gains account scheme (CGAS), otherwise, it becomes taxable. The section is also applicable if the person uses the gain to repay his home loan or avails a home loan for investing in the new house.
Summing up, it is to be stated that the transfer of property through inheritance is not taxable. However, there may be tax liabilities attached to the property if there is income that has been generated out of the property. The person is required to pay the tax under the head ‘income from other sources’ of his income tax return after the transfer of the property has been completed. The capital gain tax that is payable on the sale of the property can be divided as short term capital gain and long term capital gain. The Income Tax Act also provides certain exceptions that could be availed to eliminate the capital gain tax.