The laws surrounding real estate are often confusing. Perhaps, no other transaction comes mired with as much documentation as real estate. While the legal work might seem daunting, the right guidance can often make the difference between stress-free property ownership now and legal hassles later.
RoofandFloor spoke to our legal expert to decode some of the confusion around property received through inheritance.
I inherited some property from my grandfather. What taxes should I pay?
At the outset, it should be clear that the incidence of inheritance of property itself does not attract any taxes. The receiver of a gift or inheritance is not liable to pay tax merely due to receipt of the property.
However, once the property has been received, the inheritor might either continue to hold the property, or he may choose to sell it. And that’s when the taxes come in.
If the inheritor sells the property, he will be liable to pay capital gains tax on the sale of the property.
How is capital gains tax calculated?
For the purpose of calculating capital gains tax, the cost of acquisition and indexation is required. Although the inheritor received the property without incurring any cost, the cost of the property to the previous owner is considered to be the cost of acquisition of the property.
The capital gains can be short-term or long-term depending upon the period for which the asset is held in the hands of the owner. Where the inherited property has been held for a period longer than 36 months, it will be considered to be a long-term capital gain (LTCG) and if lesser, then a short-term capital gain (STCG). It is important to note that an exemption from such capital gains tax can be claimed under section 54F of the Income-tax Act, 1961 if the LTCG on the sale of this land is re-invested in the purchase of a new residential property. But this is subject to certain conditions:
- The individual does not own any other residential house apart from the new residential house as on the date of transfer
- The house property is acquired within one year before or two years after the transfer
What if I decide not to sell the property?
If the inheritor retains the property, he is deemed to be the ‘owner’ of the property. Every owner of house property has to pay income tax for the same under the head of “Income from House Property” on an annual basis.
For more on the calculation of income from house property, see Understanding Real Estate: Income from House Property.
In case the property is inherited by more than one individual, the tax would be receivable by each co-owner in equal proportions.
