Capital Gains Tax On Inherited Properties

At present, there is no tax on inheritance in India. However,when you sell these inherited properties, you would be liable to pay income-tax in India on the gains earned by you on the sale.

For determining capital gains, you will get a deduction of the cost incurred by the previous owner to acquire the property as well as any expenditure that you directly incur to sell the property. If the date of acquisition of the property is more than three years back, you will get a deduction of the indexed cost of acquisition which is the original cost as adjusted by the cost inflation index from the year of purchase to the year of sale. If the property has been acquired before 1 April 1981, you have the option of substituting the fair market value as on 1 April 1981 in place of the original cost. Thereafter, you can claim indexation benefit on the substituted cost.

The rate of tax, including cess on long-term capital gains, is 20.6% and on short-term capital gains, it is 30.9%. If your income exceeds Rs.1 crore, the rate of tax would be 20.66% and 33.99%, respectively.

If the seller of the inherited property is  an NRI, the purchaser of the property is required to withhold tax at source on the entire sales proceeds. To avoid this, the purchaser can make an application under section 195(2) of the Income-tax Act to the assessing officer for determining the actual tax liability or the NRI seller can make an application under section 197 for nil/lower deduction of tax at source, giving details of the taxable gains.

The proceeds on sale of the inherited property is to be credited to the sellers non-resident (ordinary) account and can thereafter be repatriated abroad, subject to the payment of due taxes. Under the present Foreign Exchange Management Act guidelines, general permission has been granted to NRIs to repatriate up to $1 million per financial year after obtaining a certificate from a chartered accountant in form 15CB certifying that due income-tax has been paid.There is no such requirement for resident Indian sellers,so matters are so much more simple.

If you are a resident for tax purposes,in countries that tax the global incomes of residents and citizens,you can take advantage of the Double Tax Avoidance Agreements (DTAAs) between India and the concerned country  to avail of tax credit in respect of the taxes paid in India on these capital gains.