The sale of an inherited property may result in capital gains that are subject to tax, and the owner of the inherited property is responsible for paying the tax at the appropriate rate. Long-term capital gains tax is applicable after the property has been owned for more than three years from the time it was purchased.
Receiving property and assets as an inheritance might be a turning point in your financial life. Understanding the tax ramifications of inherited assets is vital for future financial planning, whether it concerns a family house, real estate investments, or other significant things.
Movable and immovable assets are both eligible to be inherited. Your tax obligation may vary depending on the type of assets you inherit. When you inherit a property, it’s crucial to understand the tax implications because any income generated by these holdings would be subject to tax.
India has no inheritance tax.
Let’s clear up a frequent misunderstanding first and foremost: India does not have an inheritance tax. India currently lacks an inheritance-related tax code, unlike nations like the US, the UK, Germany, Australia, and others. In reality, India did away with the idea of taxing inheritance in 1985. As a result, you need not be concerned about an inheritance tax when you inherit property or other assets from family members.
Income Tax Effects on Inherited Assets
Even if there is no inheritance tax, you may still be subject to taxes on inherited property. The Income Tax Act of 1961 governs the applicable taxes.
Property normally passes to a person’s lawful heirs—which could be their children, grandkids, or wards—when they pass away. One could interpret this wealth transfer as a gift from the deceased to the heirs. Assets inherited through inheritance or wills are expressly exempt from gift tax under the Income Tax Act, even though the income from such transfers may be subject to income tax. As a result, inheritance-related property is not treated as a gift for tax purposes.
Tax on inherited property income
When it comes to inherited assets, a common situation is that the properties left to the new owners end up becoming sources of income, frequently in the form of rent or interest. In such cases, the income is not exempt from taxation. It is essential that those who receive the property properly record this income and pay their taxes. Legal problems and sanctions could arise if this obligation is neglected.
Taxation of inherited property sales in the future
The owner of the inherited property is responsible for paying the tax at the appropriate rate on any capital gains that result from the sale of the inherited property.
The holding time plays a crucial role in classifying these capital gains for taxable reasons. Long-term capital gains tax will become applicable if the property has been in the family’s ownership for more than three years following the date of purchase. However, Section 54 of the Income Tax Act provides some relief by potentially exempting the sale profits from taxation if they are used to buy a new home or another asset of equal or greater value.
It should be mentioned that NRIs who inherit property in India are typically excluded from inheritance tax under the Foreign Exchange Management Act (FEMA).