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Do I pay tax on selling inherited property?

Relax With Tax | August 16, 2005

 You have a question about house rent allowance, medical allowance, or even a general tax query.

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ImageI sold my inherited property for Rs 9,45,000 and bought another property for Rs 8,79,000 on March 2005.

How will I be taxed?

Will I be taxed for the whole 9,45,000 since it is inherited? Or for the difference in amount between how much I sold and bought the properties?

- Ratheesh C Lalithakumariamma

Understanding capital gains

When you sell any asset you own (house, land, shares, mutual fund units, gold, debentures, bonds) and make a profit, it is known as capital gain.

The tax you pay on this profit is called the capital gains tax.

House property is a capital asset. Its sale and subsequent profit attracts capital gains.

The time frame matters

You have not stated how long you have held this asset before you sold it.

Depending on how long you owned the house before you sold it, the money you make on the sale would be long-term or short-term capital gain.

If you owned the house an asset for less than three years (36 months) before selling it, then it is considered a short-term capital asset.

If you sell it after this time, it is a long-term capital asset.

In determining this period, the period of holding by the previous owner also needs to be included.

Will I be taxed?

Yes, you will be taxed.

However, you can avoid paying capital gains tax by investing elsewhere.

There is no such option in the case of short-term capital gain, only for long-term capital gain.

How the tax is calculated

Short-term capital gains is added to your total income. Depending on which tax bracket you fall under, you will be taxed.

In the case of long-term capital gains, you will get the benefit of indexation. Indexation is the process by which inflation is taken into account so that the amount you end up paying as tax is reduced.

The tax on long-term capital gain is much lower than that on short-term capital gain.

To understand indexation in detail and see how it affects the payment of tax, read All you need to know about capital gain.

The cost of acquisition

If you had bought a property and sold it, it would be easy to determine the cost of acquisition (price you paid to buy it) and cost of sale (price you got for selling it).

Not so easy when you inherit the property.

As the property has been inherited by you, the cost to the previous owner (person from whom you inherited the property) would be the cost of acquisition for you.

However, if the property has been acquired by the previous owner before April 1, 1981, then the Fair Market Value (market price) as on this date needs to be considered.

What if the FMV is higher or lower than the original cost? Then the higher figure is taken into account.

How much is the tax?

Firstly, you will not be taxed on the entire amount you made when you sold the property.

You will only be taxed on your capital gain. You only need to reinvest the capital gain (not the entire amount) to save on capital gains tax.

One way to do this is to buy a new house (Section 54 of the Income Tax Act), which is what you have done.  

If the entire capital gain is reinvested in the new property, then no capital gain tax would be applicable.

In case the amount of capital gain is less than the cost of the new house property, the entire amount of capital gain is exempt from tax.

On the other hand, if the amount of capital gain is more than the cost of the new house property, the difference between the amount of capital gain and the cost of the new house property will be taxed as long-term capital gain.

Read Your home and capital gains to look at the various avenues of investment to avoid capital gains tax.

Got a question for Relax With Tax? Please write to us!

Note: Questions may be edited for brevity. Due to the tremendous response, all queries will not be answered.

Disclaimer: While efforts have been made to ensure the accuracy of the information provided in the content, or the author shall not be held responsible for any loss caused to any person whatsoever who accesses or uses or is supplied with the content (consisting of articles and information).

Illustration: Dominic Xavier

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