An inherited property refers to any possession that you receive from your father, grandfather or great-grandfather.
Selling property that you have inherited from your ancestors can be a complex process, especially when it comes to taxes. Let’s break it down into simple terms to help you grasp the key points. When it comes to inheritance, you won’t have to pay taxes on the property you receive. You will have to pay the taxes only when you decide to sell the inherited property.
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So, what exactly qualifies as an inherited property according to the law? An inherited property refers to any possession that you receive from your father, grandfather or great-grandfather. It’s important to note that assets inherited from other relatives, including maternal ones, are not considered ancestral properties under the Income Tax Act of 1961.
Now, the responsibility to pay taxes on the sale of an inherited property falls upon the owner of the property. While any asset received through inheritance is completely exempt from gift tax, the money you receive from selling that asset is subject to taxation. This taxable amount falls under the category of capital gains.
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Capital gains can be categorised as either long-term or short-term, depending on the duration you held the property. If you owned the inherited property for two years or more, the revenue earned from its sale is considered a long-term capital gain.
When calculating the holding period for an inherited house, not only the duration you owned it but also the period for which the previous owner held the property is taken into account. This means that in most cases, an inherited property is already eligible for long-term capital gains tax.
There are specific rules regarding the cost of acquisition for tax purposes. If the property was inherited before April 1, 1981, you have the option to substitute the fair market value of the property instead of the original cost. On the other hand, if the property was inherited after April 1, 2001, the cost of acquisition is considered to be Rs 50,000.
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In the case of an inherited property acquired after April 1, 1981, you won’t be able to substitute the amount paid by previous owners for tax purposes. However, in some cases, you will be entitled to benefit from indexation starting from the year the previous owner obtained the house.
