How to Avoid Paying Capital Gains Tax on Inherited Property?

Wondering

how to avoid capital gains tax on inherited property in India

. In India, capital gains tax is applicable on the sale of inherited property. However, there are certain ways to legally minimize or avoid paying this tax.

How to Avoid Paying Taxes on Inherited Property?

Here's a guide on how to avoid capital gains on inherited property:

• Section 54: If the inherited property is a residential house, you can claim exemption under Section 54 by reinvesting the capital gains into another residential property.

The new property must be purchased within one year before or two years after the sale of the inherited property, or constructed within three years from the date of sale.

• Section 54EC: This section allows you to claim an exemption if the capital gains are invested in specified bonds (such as bonds issued by the National Highways Authority of India or Rural Electrification Corporation) within six months of the sale.

The investment has a lock-in period of five years, and the maximum amount eligible for exemption is Rs. 50 lakhs per financial year.

• Section 54F: If the inherited asset is not a residential property, but other types of assets, you can claim exemption under Section 54F by purchasing a residential house. The conditions are similar to Section 54, but the entire sale proceeds must be invested to get a full exemption.

Transferring the property as a gift to a close relative (as defined under the Income Tax Act) can be a strategy. Capital gains tax liability will arise when the recipient eventually sells the property, but this can defer the tax liability.

If you have any other capital losses, they can be set off against the capital gains from the sale of inherited property, thereby reducing the taxable amount.

If you cannot reinvest in a new property or specified bonds before filing your income tax return, you can deposit the capital gains in the Capital Gains Account Scheme. The amount deposited can be used later to purchase or construct a new property.

Tax laws can be complex, and a tax professional can help you navigate the rules, ensure compliance, and optimize tax savings. This is

how to avoid capital gains tax on inherited property in India

.

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Ancestral property refers to assets passed down through father, grandfather, and subsequent male lineages for up to four generations. Any property that an individual inherits from ancestors initially has no tax liability at the time of inheritance. At the moment, no tax is applied to that. The capital gains made on the sale of the inherited property, however, will be taxable as and when the inheritor sells it. Hence, let us focus on how to avoid paying capital gains tax on inherited property. 

The capital gains and their standards determine the tax liability for the sold-off ancestral property.

• Gains from a property are referred to as long-term capital gains if they are retained for a period of time longer than 24 months after the date of acquisition. This capital gain is subject to an index-based tax of 20.8% (including cess).

• Gains from a property are referred to as short-term capital gains if they are realised within 24 months of the date of acquisition.  This capital gain is subject to taxation at the assessee's appropriate slab rate.

How to avoid capital gains tax on inherited property?

The main tax advantage of inherited property is the ability to claim tax exemption on earnings from the sale of the same property.

There are three possibilities for this:

• The first alternative is to reinvest the profits in additional real estate. This can be utilised if the long-term capital gains are under Rs. 2 crores and only up to two residential properties in India are used for reinvestment.

The inheritor can reinvest in one property to qualify for a tax exemption if gains exceed Rs. 2 crores.

These investments must be made within the allotted time frames, which are one year before the sale, two years after the sale, or three years for a property that is still under construction.

• The second choice is to build a house with the proceeds within three years of selling the ancestral property.

• The third choice is to use Section 54EC of the Income-tax Act, 1961, which allows you to invest the number of gains in capital gains bonds. These bonds have a restriction on the maximum amount that can be invested, which is Rs. 50 lakh every fiscal year.

I hope this suffices your query about how to avoid paying capital gains tax on inherited land. 

One can invest in specific instruments, like buying a residential property or NHAI/REC Bonds, to avoid paying taxes on the sale of inherited property.

I hope now you have understood how to avoid paying capital gains tax on inherited property. I hope this helps:)

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