Inherited assets, shares, other assets? Know the income tax rules


A person can receive an inheritance either under a will or under the personal law of the deceased if the deceased did not make a will or even if he made a will but the assets are not covered by the will. There is confusion and curiosity about the tax laws applicable to property inherited by a person. Let’s discuss the tax implications of inheriting assets and selling inherited assets.

Tax liability at the time of the succession of the asset

Since India has no inheritance tax, the person who inherits property under a will or under personal law does not have to pay tax on it. this. In addition, Article 56(2)(x) which provides for the taxation of gifts received in the hands of the beneficiary specifically provides an exemption with respect to property received at the time of inheritance. However, the person receiving the inheritance must pay tax on the income earned on the property he inherited once he becomes the owner.

Tax liability at the time of sale and determination of cost in such cases

Although there is no tax when the inheritance is received, the person must pay capital gains tax when selling the inherited asset. Although it has no acquisition cost of the inherited assets, but for the purpose of calculating capital gains, its acquisition cost is the amount that was paid by the original previous owner.

In the event that the asset was acquired before April 1, 2001, the seller has the option of substituting the fair market value of the asset on April 1, 2001 as its cost for the purposes of calculating long-term capital gains. term. To arrive at fair market value, you can obtain an appraisal certificate from a licensed appraiser. In the case of real estate, the fair market value of the property cannot exceed the value of the stamp duty on April 1, 2001.

Calculation of the holding period for the determination of capital gains

In order to determine whether the asset being sold is a long-term asset or a short-term asset, the holding period for the seller must be calculated from the date the original owner purchased the asset. Although the law allows you to override the previous owner’s cost in the case of inherited property, it does not specifically provide that the benefit of indexation will also be available from the date the previous owner inherited it. acquired. A strict reading of the law says that indexation will be available from the date the seller took ownership of the asset.

However, some of the court statements like CIT Vs. Gautam Manubhai Amin from Gujrat High Court, Arun Shungloo Trust Vs. CIT from Delhi High Court and CIT Vs. Manjula J. Shah from Bombay High Court held that, since the cost to the owner previously paid must be replaced, indexation should also be allowed from the date of purchase by the previous owner or from 1-4-2001 in the event of a fair market. value on that date is adopted.

Indexed capital gains are taxed at a flat rate of 20%. However, in the case of listed securities other than listed stocks and shares, you have the possibility of paying a tax of 10% without benefiting from the benefit of indexation.

Tax savings opportunities for long-term capital gains on the sale of inherited assets

If the asset being sold is a long-lived asset, you can save capital gains tax by investing in a residential home or capital gains bonds depending on the nature of the asset being sold within the prescribed time frame . The amount of investments to be made in a dwelling house will vary depending on whether the property sold is a dwelling house or any other property.

Specific provisions for listed shares and UCITS

In the event that the inherited capital property consists of publicly traded shares or units of equity-oriented organizations, the law provides that you may take the fair market value of the shares and the net asset value of the mutual fund units investment as of January 31, 2018 in case they were acquired before February 1, 2018. Long-term capital gains will be taxed at a flat rate of 10% after an initial lakh on which no tax is due if the STT is paid. It is important to note that no indexing benefit is available on listed shares and shares of equity-oriented organizations.

Balwant Jain is a tax and investment expert and can be reached on [email protected] and @jainbalwant on twitter

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