How is Tax on Sale of Inherited Property Calculated?

July 11, 2019

How is Tax on Sale of Inherited Property Calculated?

Taxation on the sale of inherited property is considerably different as compared to a sale of a property obtained through outright purchase. Check out this post to know how the tax on the sale of inherited property is calculated.

Estate Tax, popularly known as Inheritance Tax, is a type of tax that is levied when you inherit an asset such as a property. Under Section 56(ii) of the IT Act, there is no Inheritance Tax applicable in India irrespective of the cost of the property you inherit. However, if you decide to sell one such inherited property, the capital gains will be taxed. How is this inherited property tax calculated when you choose to sell such property? Let us have a look:

Capital Gains Tax on Sale of Inherited Property

Depending on the duration for which the initial buyer and the inheritor held the property, one might be required to pay Short-Term Capital Gains (STCG) tax or Long-Term Capital Gains (LTCG) tax. If a property was held for less than three years, you would be required to pay STCG tax, and if it was held for more than three years, LTCG tax would be applicable. Currently, the LTCG on the sale of a property is fixed at 20%. STCG is calculated as per the marginal income tax slab of the inheritor and can be up to 30%. Based on the duration, you can pay the property tax online.

The duration for which the original buyer and the inheritor held the property will be taken into consideration. So, even if an inheritor inherited an estate only last year but it was purchased by the original buyer five years ago, he/she will still be required to pay LTCG tax when selling the inherited property.

Indexation Cost of Acquisition

The Cost Inflation Index (CII) is used as the indexation cost of acquisition. The year 2000-2001 is taken as the base year for computing CII. All the property purchases before 2000-2001 are considered to have a CII of 100. The government fixes and releases the CII every year before the beginning of a financial year. For calculating the tax on the sale of property that is inherited, the CII plays a critical role as it is used for knowing the inflation-adjusted increase in the cost of the property.

Illustration

Let us assume that you inherited a property in 2012 that your father purchased in 2001 for Rs 8 lakh. In 2018, you decided to sell the property for Rs 30 lakh. As the property was held for more than three years, LTCG tax will apply to the transaction.

Here is how the tax will be calculated:

Index Factor of the Purchased Price: 280/100 = 2.8.

Here, 280 is the CII of the year 2018 as the property was being sold in 2018 and 100 is the index factor base.

Purchase Cost Index Value = 2.8 x 8,00,000 (actual cost of property) = 22,40,000.

So, if the property is sold at Rs 30 lakh, the inflation-adjusted profit would be Rs 7,60,000 (30,00,000 - 22,40,000).

The LTCG of 20% will only apply to the capital gains and will be Rs 1,52,000 (20% of Rs 7,60,000). You can pay this house tax online at the official government website. No tax will be paid on the Purchase Cost Index Value which is Rs 22,40,000 in this illustration.

LTCG Exemption

As you can see, the tax liability on the sale of inherited property can be substantial. However, there are two different ways in which you can get LTCG exemption. You have the option to invest the LTCG in the construction of new property within three years from the date of sale or purchase a new property within two years from the date of sale.

The other option is to invest in Rural Electrification Corporation (REC) or National Highway Authority of India (NHAI) bonds. These bonds are specifically created to help people get LTCG tax exemption and are also known as capital gain bonds.

Selecting the Right Investment Option

Now that you know how the tax is calculated on the sale of inherited property, it should be easier for you to pay appropriate taxes. You can now easily check the property tax status and pay the same online.

If you are planning to invest in capital gain bonds to save taxes on the sale of inherited property, you can consult a top bank to know more about these options. Even if you are planning to purchase or construct a house to get LTCG exemption, you can discuss with the bank to get a loan for the same.

 

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