Receiving a flat, gold or other assets through inheritance does not trigger a tax liability immediately, but that can change when you decide to sell it for a profit. The resulting gain must be offered for taxation, though the capital gains computation depends on several different factors.
All types of capital gains are reported under Schedule CG of the relevant income tax return (ITR). If you have income from salary, pension, and capital gains which are more than ₹1.25 year in a financial year, then ITR-2 becomes applicable. However, in cases where you run a business or have income from professional services, then ITR-3 must be filed.
How are capital gains determined?
For an inherited property, the heir generally adopts the previous owner’s cost by of acquisition, along with eligible improvement costs, subject to the provisions of the Income-tax Act. Each heir calculates capital gains based on their proportionate share of the sale consideration, acquisition and improvement costs, and transfer expenses.
The holding period of the previous owner is also considered in cases where the asset was received as a gift or through inheritance. This determines whether the gain is short-term or long-term and the amount of tax payable.
For example, if you receive a house from your father through inheritance and later sell it, capital gains will be computed using your father’s cost of acquisition, eligible improvement costs, and the period for which the property was held.
Let’s say the house was acquired by your father in 2003, then the fair market value of the flat on 1 April, 2004 can be taken as your cost.
As per income tax rules, the previous owner’s holding period will also be added to determine whether short-term capital gains or long-term capital gains will be applicable.
STCG applies if the property is held for 24 months or less. The profit is added to your total income and taxed at your applicable income tax slab rates. LTCG applies if the property is held for more than 24 months and it is taxed at a flat rate of 12.5% without indexation.
Can you claim tax relief?
Yes, one can claim tax relief from long-term capital gains tax arising from the sale of a residential house property, given that they reinvested the proceeds in another residential house. This applies to all sorts of property transactions, regardless of whether you inherited it or bought it using your own funds.
As per Section 54, the deduction is available only on long-term capital gains and the maximum exemption that can be claimed is capped at ₹10 crore. If the capital gains from the sale do not exceed ₹2 crore, the taxpayer has a one-time option during their lifetime to invest in two residential houses and claim exemption.
The owner must also purchase a residential property within one year before or two years after selling the original property. They also have the option to construct a new residential house within three years from the date of transfer. One must ensure that the new residential property is located in India.
In the meantime, you can keep your funds locked in the Capital Gains Account Scheme (CGAS), which is a government-backed program that lets you temporarily park uninvested capital gains to claim tax exemptions under sections like 54, 54B, 54F, or 54EC of the Income-tax Act.
Radhika Goyal is Author of Taxconcept Gurugram head office, for deeply reported tax, gst and income tax articles on issues that matter. He splits her time between New Delhi and Bengaluru, and has worked as a reporter, a podcaster and an editor for publications across India.