Recent news reports suggest that Inherited Property assets, at least for High Net-worth Individuals, may soon be taxed under proposed new laws as the government seeks to shore up the nation’s tax revenue. Bequeathed assets are not liable to tax in India at the moment. Section 56 (2)(v) sub sub clauses c and d maintain that money received “under a will or by way of inheritance or in contemplation of death” of the taxpayer will not be interpreted as income from other sources. That head is otherwise taxed at ordinary income tax rates as specified in the Finance Act, 2017 below:
Inherited Property Tax Laws in India
|Rates of income-tax|
|(1)||where the total income does not exceed Rs. 2,50,000||Nil;|
|(2)||where the total income exceeds Rs. 2,50,000 but does not exceed Rs. 5,00,000||10 per cent. of the amount by which the total income exceeds Rs. 2,50,000;|
|(3)||where the total income exceeds Rs. 5,00,000 but does not exceed Rs. 10,00,000||Rs. 25,000 plus 20 per cent. of the amount by which the total income exceeds Rs. 5,00,000;|
|(4)||where the total income exceeds Rs. 10,00,000||Rs. 1,25,000 plus 30 per cent. of the amount by which the total income exceeds Rs. 10,00,000.|
When you inherit movable or immovable property, your tax liabilities do not vanish into thin air. You must still pay tax on income arising out of the inheritance, such as rent received on residential and commercial buildings, interest on savings bank accounts and so on. You must then also fill income tax return forms and classify the entry under the right head.
For instance, if you were bequeathed a house, then you may use the following steps to calculate your tax liability:
- Find the Gross Annual value: If the house is occupied by a person on rent, then that rent (accrued at the end of the financial year) will be the GAV. If you plan to live in the house yourself, then the GVA will be zero.
- Any property tax that you have paid during the current financial year can be deducted from the GVA.
- Calculate the Net Annual Value: Subtract 30% of the GVA to account for home renovations and repairs.
- If you inherited a property whose loan repayments have yet to be completed, then you should also deduct the monthly principal amount from the NVA.
- The value so obtained is your “income from house property” and should be mentioned under that head in the ITR form.
Note that you should not classify the income as ‘income from house property’ if the premises are used for a business or profession. Such property ought to be classified as ‘income from business or profession’ instead.
What If I Decide to Sell the Property?
If you decide to sell the inherited property in lieu of cash you would be liable to pay Capital Gains Tax. Further, if you hold the property for more than 2 years from the date you received it, then you would be taxed at rates applicable to long term capital gains. If held for less than 2 years, the tax rate applicable would be that for short term capital gains. While the former is taxed at 10% of the value of profit, the latter is taxed at 20%.
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