Capital Gains Tax on Inherited Property

Inheriting property does not attract immediate tax implications. However, when the inheritor decides to sell the inherited property, capital gains tax becomes applicable. Understanding the nuances of capital gains tax on inherited property is essential for effective financial planning and compliance with tax regulations.

When an individual sells an inherited property, the profit earned from the sale is subject to capital gains tax. The nature of the capital gain—short-term or long-term—depends on the holding period of the property.

• Long-Term Capital Gains (LTCG): If the property is held for more than 24 months from the date of acquisition, the gains are classified as long-term. LTCG is taxed at 20% with the benefit of indexation, which adjusts the purchase price for inflation.
• Short-Term Capital Gains (STCG): If the property is held for 24 months or less, the gains are considered short-term. STCG is taxed as per the individual's applicable income tax slab rates. 

It is important to note that inheriting property itself does not attract any tax in India. However, upon selling the inherited property, capital gains tax is levied on the profit earned from the sale. The calculation of capital gains involves determining the difference between the sale price and the cost of acquisition, which can be adjusted for inflation using the Cost Inflation Index (CII). 

To compute the capital gains tax on the sale of inherited property, follow these steps:

1. Determine the Holding Period: Calculate the duration for which the property was held to ascertain whether the gain is short-term or long-term.
2. Compute the Indexed Cost of Acquisition: Adjust the original purchase price using the CII to account for inflation.
3. Calculate Capital Gains: Subtract the indexed cost of acquisition from the sale price to determine the capital gain.

Illustration:

Consider an individual who inherited a property in 2012, which was originally purchased by the deceased in 2001 for Rs. 8 lakh. The individual sells the property in 2018 for Rs. 30 lakh.

• Indexed Cost of Acquisition:
•  
  • CII for 2001-02: 100
  • CII for 2018-19: 280
  • Indexed Cost = (CII of Sale Year / CII of Purchase Year) × Original Purchase Price
  • Indexed Cost = (280 / 100) × Rs. 8,00,000 = Rs. 22,40,000
  •  
• Capital Gain:
  • Sale Price: Rs. 30,00,000
  • Indexed Cost: Rs. 22,40,000
  • LTCG = Sale Price – Indexed Cost = Rs. 30,00,000 – Rs. 22,40,000 = Rs. 7,60,000
  •  
• Tax Liability:
  • LTCG Tax @ 20% = 20% of Rs. 7,60,000 = Rs. 1,52,000

In this example, the individual would be liable to pay Rs. 1,52,000 as LTCG tax. 

Indexation is a method to adjust the purchase price of an asset for inflation, thereby reducing the taxable capital gain. The formula for calculating the indexed cost of acquisition is:

Indexed Cost of Acquisition=Original Purchase Price×(CII of Purchase Year/ CII of Sale Year)

This adjustment ensures that the capital gains tax is levied only on the real gain, accounting for the inflationary increase in the asset's value. 

Selling an inherited property in India entails a clear understanding of capital gains tax implications. While inheriting property does not attract tax, the sale of such property does. Proper computation of capital gains, considering indexation benefits, can significantly reduce tax liability. It's advisable to consult with a tax professional to navigate the complexities involved and ensure compliance with the prevailing tax laws. If you are looking for safe investment option, then you can consider investing Bajaj Finance Fixed Deposit. With a top-tier AAA rating from financial agencies like CRISIL and ICRA, they offer one of the highest returns, up to 8.60% p.a.