When you inherit a house or land from your parents or relatives, you do not pay any tax at that time. In India, there is no inheritance tax. But when you sell the property, you have to pay tax on the profit earned. This tax is called capital gains tax. If the property was owned for more than two years, the profit is treated as a long-term capital gain. Even if you inherited it recently, the holding period of the previous owner is also counted.
The cost of acquisition for tax calculation is the price paid by the original owner. You can also include the cost of improvements made by them. The cost is adjusted for inflation using the Cost Inflation Index. This helps to reduce the taxable profit.
Exemptions to Save Tax
The Income Tax Act offers various ways to save or reduce capital gains tax on inherited property.
One option is to claim exemption under Section 54. You can invest the sale proceeds in buying a new residential house. You must buy it within two years of the sale or construct one within three years. You can also claim the exemption if you purchased a house one year before selling the inherited property.
After selling inherited property, some people prefer safe investment options. You can check New FD Rates in 2025 After RBI Cuts: Top 10 Banks Compared to know which banks are currently offering the best fixed deposit returns.
Another option is Section 54EC. You can invest up to ₹50 lakh of capital gains in specific government bonds such as NHAI or REC. This must be done within six months of the sale. These bonds have a lock-in period of five years. The amount invested in these bonds will not be taxed.
Section 54F is another way to get tax relief. This section is useful when you sell a non-residential property but want to invest in a house. To get full exemption, you must invest the entire sale consideration in buying a residential house.
Plan Before You Sell
Before selling the inherited property, it is important to calculate the indexed cost of acquisition. This gives you a clear idea of the tax you may have to pay. You should consult a tax expert to decide which exemption will suit your case.
If the property is inherited by more than one person, it is better to create a proper partition deed. This helps avoid disputes and also allows each heir to claim exemptions individually.
Another way to save tax is to sell the property in parts over different financial years. This allows each seller to use the basic exemption limit and other allowances every year.
Key Points to Remember
- There is no tax on inheritance in India. Tax is only on selling the property.
- To save tax, you can reinvest in another house under Sections 54 or 54F.
- You can also invest in NHAI or REC bonds under Section 54EC.
- Proper planning and documentation can help reduce or avoid the tax completely.
By using these options wisely, you can preserve family wealth and avoid paying high capital gains tax on inherited property.
