Do I Need To Pay Tax On Inherited Property?

Inheriting property and assets can be a pivotal moment in your financial journey. Whether it's a family home, real estate investments or other valuable possessions, comprehending the tax implications of inherited assets is crucial for future financial planning.  

Inherited assets may include both movable and immovable properties. Depending on the kind of assets you receive in inheritance the tax liability could differ. It’s important to understand the tax implications when you inherit a property as any earnings from such properties will attract tax.

No Inheritance Tax in India

First and foremost, let's address a common misconception – India does not impose an inheritance tax. While countries like the US, the UK, Germany, Australia, and others have tax codes related to inheritance, India does not have such a law currently. In fact, India abolished the concept of levying tax on inheritance in 1985. Therefore, when you inherit property or assets from your family, you don't need to worry about an inheritance tax.

Income Tax implications on inherited assets

The absence of an inheritance tax doesn't mean you are entirely exempt from taxation when it comes to inherited properties. Relevant taxes come into play under the Income Tax Act, 1961.

When someone passes away, their properties usually transfer to their legal heirs, which may include children, grandchildren or wards. This transfer of assets can be seen as a gift from the deceased to the heirs. Although earnings from such transfers might be subject to income tax, the Income Tax Act explicitly excludes assets received through inheritance or wills from the scope of gift tax. Consequently, property received through inheritance is not taxable as a gift.

Tax on income from inherited property

In the realm of inherited assets, a frequent scenario unfolds where these bequeathed properties evolve into income streams for their new owners, often in the form of rent or interest. In such instances, this income doesn't evade the taxman's purview. It is of paramount importance for the receivers of the property to duly report this income and fulfil their tax obligations. Neglecting this responsibility could result in legal issues and penalties.

Taxation on subsequent sales of inherited assets

When an inherited property is sold, the ensuing capital gains may attract tax and the owner of the inherited property is liable to pay the tax at the applicable rate.  

The pivotal determinant in categorising these capital gains for taxation purposes revolves around the holding period. Once the property is in the family's possession for more than three years from the date of acquisition, long-term capital gains tax will be applicable. However, a relief can be found in Section 54 of the Income Tax Act, offering a potential exemption if the sale proceeds are used for acquiring a new home or another property of equal or greater value.

It should be noted that NRIs inheriting property in India under the Foreign Exchange Management Act (FEMA) generally remain exempt from inheritance tax also.