Selling an inherited property in India can trigger capital gains tax, even though the person selling it did not originally buy the property. The tax liability depends on factors such as the original owner’s purchase date and cost, the property’s sale price and the period for which it was held.
Unlike a regular property sale, the cost of acquisition and holding period for inherited property are generally determined with reference to the previous owner. This can affect whether the gains are classified as short-term or long-term, and the tax payable.
For properties acquired by the previous owner before April 1, 2001, heirs can use the fair market value as on April 1, 2001, as the cost of acquisition, instead of the original purchase price.
Ashok Singh Jaunapuria, MD & CEO, SS Group, a Gurugram-based real estate company, said inherited property is generally not taxed at the time of inheritance, with the tax liability arising when the heir sells it. He said heirs should first establish clear ownership, verify property documents and understand the capital gains implications before entering into a transaction.
Jaunapuria also said heirs should consider the property’s proper valuation and available tax exemptions, including the conditions and timelines for reinvestment, before deciding whether to retain or sell the asset.
Maintaining documents related to the property’s purchase, ownership history and subsequent improvements can help establish the cost and calculate capital gains.
Hardik Shah, Director, Shyam Group – Dholera SIR, India’s first planned greenfield industrial smart city, said the previous owner’s acquisition cost and holding period are important in determining the tax treatment of inherited property. Heirs should retain documents relating to the original purchase and any improvements made to the property, as these records can help establish the cost of acquisition when calculating capital gains.
How is capital gains tax calculated?
The tax treatment depends on when the previous owner acquired the property and how long it was held.
For long-term capital gains (LTCG) on property, the applicable tax rate is generally 12.5% without indexation.
However, resident individuals and Hindu Undivided Families (HUFs) selling land or buildings acquired before July 23, 2024, can compare the tax payable at 12.5% without indexation with the earlier 20% rate with indexation.
They can opt for the method that results in a lower tax liability, subject to the applicable conditions.
Can heirs reduce the tax liability?
Certain exemptions may help reduce the tax burden if the sale proceeds are reinvested in another residential property or specified bonds.
Aman Gupta, Director, RPS Group, a real estate and infrastructure developer, said heirs should assess the tax liability and the net proceeds they would receive before deciding to sell. These exemptions come with specific eligibility conditions and timelines that need to be followed.
In cases where a property is inherited jointly, each heir must also establish their ownership share to determine their respective tax liability.
Gupta said consulting a tax professional can help heirs assess the available exemptions and make an informed decision before completing the sale.