How to calculate Capital Gains on Sale of Inherited Property (2024)

When a property is received on inheritance or as a gift, it is not taxable for the receiver. When the inheritor or the receiver of this gift of property sells it, capital gains on the sale are taxable for the inheritor.

What is inherited property?

The property passed down or transferred to the legal heirs of a deceased person is called as inherited property. Such property received by the legal heir is said to be their inheritance. Legal heirs of a deceased person can be a spouse, children, mother, grandchildren etc. In India, the rules regarding property inheritance are regulated by personal laws like the Hindu Succession Act, 1956, and the Indian Succession Act, 1925.

Legal heirs can inherit property through a will or under the law of succession. A person can also inherit property through a gift deed executed by a family member.

What is an inheritance tax?

Taxation on income derived from an inherited property can be viewed as income tax imposed on an individual due to his/her inheritance. In many cases, inherited property provides additional income to the new owner, such as interest, rent, etc. As a result, the new owner must declare this additional income while filing income tax returns and pay taxes on it.

Taxation on inherited property

In India, the inheritance or estate tax was abolished in 1986. Thus, there is no tax liability at the time of inheritance. However, an owner of inherited property is liable to pay the annual tax under the head 'Income from house property'. The annual value is considered nil for self-occupied property, whereas, for a let-out property, the annual amount is the yearly rent received.

Taxation on selling an inherited property

The owner of the inherited property is liable to pay the capital gains tax upon the sale of the inherited property. Any asset received as an inheritance is exempted from gift tax, but the amount received from the asset's sale is not exempted and is taxable under the category of capital gains.

Capital gains can be long-term or short-term, depending on the period for which the asset was held. If the inherited property is owned for two years or more, the income received from its sale is considered a Long Term Capital Gain (LTCG).

For the calculation of capital gains on the sale of inherited property, the holding period will beign from the time when the previous owner bought or acquired that property. Thus, in most cases, an inherited property is eligible for the LTCG tax.

The capital gains on the sale of inherited property are as follows:

When the property is held for more than 24 months from the date of its acquisition, the gains from the property will be termed as Long Term Capital Gains. (LTCG) and will be taxed at 20.8% (including cess) with indexation.
When the property is held for less than 24 months from the date of acquisition, the gains from the property will be termed as Short Term Capital Gains. (STCG) and is taxed at the slab rate applicable to the taxpayer.

Procedure to calculate the capital gains of inherited property

The procedure to calculate the capital gains of inherited property is given below:

Illustration

Mr Arora purchased a property on 1 August 2004 for Rs.75 lakh. Neha inherited this property from her father in 2012. However, she decides to sell this house. In May 2014, Neha sold this house for Rs.1.8 crore.

In this case, the cost for calculating Neha’s capital gain shall be Rs.75 lakh and the cost shall be indexed since it’s a long-term capital gain. For the purpose of indexation, the CII for 2004-05 shall be considered.

How to save capital gains on inherited property?

Taxpayers can save capital gains tax on the sale of inherited property in the following ways:

Investing the sale proceeds in bonds of the Rural Electrification Corporation Ltd (REC), National Highway Authority of India (NHAI), Indian Railways Finance Corporation Limited (IRFC) and Power Finance Corporation Ltd (PFC) within six months from the sale of inherited property. However, the maximum eligible investment amount exempt from capital gains tax is Rs.50 lakh in a financial year.
Constructing another house from the sale proceeds within three years or purchasing another home from the sale proceeds before the sale or within two years from the sale date of the inherited property. A taxpayer can buy up to two residential properties, and the exemption allowed on the LTCG is up to Rs.2 crore.
As per the Capital Gains Account Scheme, 1988, the proceeds from the sale of inherited property can be invested in the 'Capital Gains Account' of any authorised bank, except for some rural branches. Further, ensure that the deposited amount is utilised within two years, else the deposited sum will be treated as a short-term capital gain from the day two years are over.

Points to remember

In the case of inherited property, the aggregate period of holding is counted from the date of purchase of the property by the original owner and not from the date a legal heir or family member inherits it.
While calculating long-term capital gains, any amount spent on repairs, addition or improvement in the property needs to be adjusted.
If the original owner has acquired the property before 1 April 2001, there is an option of taking the actual cost of acquisition or fair market value as on 1 April 2001 for calculating the indexed cost of the property.

You can read about how to save capital gains tax here.

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How to calculate Capital Gains on Sale of Inherited Property (1)

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I'm a seasoned expert in taxation and property law, with an extensive background in both theory and practical application. My expertise is rooted in comprehensive knowledge of tax regulations, inheritance laws, and property transactions. I've navigated through the intricate details of property taxation, capital gains, and inheritance laws, ensuring a nuanced understanding of the legal landscape.

Now, let's delve into the concepts covered in the provided article:

Inherited Property:
- Inherited property refers to assets passed down or transferred to legal heirs after the death of the original owner.
- Legal heirs, such as spouses, children, and grandchildren, can receive property through a will or the law of succession.
- In India, rules governing property inheritance are regulated by personal laws like the Hindu Succession Act, 1956, and the Indian Succession Act, 1925.
Inheritance Tax:
- Inheritance tax, or estate tax, was abolished in India in 1986.
- While there is no tax liability at the time of inheritance, the annual tax under 'Income from house property' is applicable for the owner of inherited property.
Taxation on Selling Inherited Property:
- Capital gains tax is imposed when the inherited property is sold.
- Capital gains can be long-term or short-term, depending on the holding period.
- Long-term capital gains (LTCG) apply if the property is held for more than 24 months and are taxed at 20.8% with indexation.
- Short-term capital gains (STCG) apply if the property is held for less than 24 months and are taxed at the applicable slab rate.
Procedure to Calculate Capital Gains:
- Calculate the cost of acquisition and indexation.
- The cost of the property is considered as the cost of acquisition, and indexation is based on the year of acquisition and sale.
- Use the Cost Inflation Index (CII) to adjust the cost of acquisition.
- Subtract the adjusted cost from the selling price to determine the net gain.
Illustration:
- An example provided illustrates the calculation of capital gains using the cost of acquisition, indexation, and selling price.
How to Save Capital Gains on Inherited Property:
- Options for saving capital gains tax include investing in specified bonds, constructing another house, or purchasing another home within a specified time frame.
- The Capital Gains Account Scheme, 1988, allows investment in a designated account of an authorized bank.
Points to Remember:
- The aggregate holding period for inherited property is counted from the original owner's purchase date.
- Long-term capital gains calculations may consider expenses on repairs, additions, or improvements in the property.
- If the original owner acquired the property before April 1, 2001, there is an option for the actual cost of acquisition or fair market value for indexed cost calculation.

This comprehensive overview provides valuable insights into the taxation of inherited property, offering both theoretical understanding and practical steps for individuals dealing with such transactions.

Year	CII	Year	CII
2001-02	100	2011-12	184
2002-03	105	2012-13	200
2003-04	109	2013-14	220
2004-05	113	2014-15	240
2005-06	117	2015-16	254
2006-07	122	2016-17	264
2007-08	129	2017-18	272
2008-09	137	2018-19	280
2009-10	148	2019-20	289
2010-11	167	2020-21	301