Mumbai: In Mumbai, the intricacies of tax implications for inherited properties come into focus, spotlighting the absence of tax liabilities at the inheritance stage while emphasizing that tax issues arise only upon selling the inherited asset. With critical insights from financial experts, the article breaks down the advantages of leveraging fair market values and tax options available for residents and non-resident Indians alike, ensuring potential sellers make informed financial decisions.
The Basics of Inherited Property and Taxation
Inheriting a property—be it your family’s flat in Mumbai or a piece of land from your ancestors—doesn’t incur taxes at the point of inheritance. The Income Tax Act clearly stipulates that no tax is levied when the property transitions to you. However, matters become complicated when you decide to sell. At the time of sale, any profit generated from the transaction is classified as capital gain, which is where tax implications emerge.
When selling an inherited property, the law allows you to “step into the shoes” of the previous owner. This means that both the cost of acquisition and the holding period get transferred along with the property. This aspect can significantly impact your tax calculations.
Gautam Nayak, partner at CNK & Associates, elaborates: “The cost and date of acquisition and holding period is considered from the cost and date of acquisition by the original owner and, for older properties acquired prior to April 2001, there is also the option of using fair market value as of 1 April 2001 for the cost.” This detail is crucial, particularly for properties acquired before this date, as it allows heirs to potentially reduce taxable gains significantly.
Understanding Fair Market Value (FMV)
For older properties, opting for the fair market value (FMV) as of April 1, 2001, becomes essential. This choice can make a significant difference when calculating any capital gains tax owed. Furthermore, when selling, you can factor in expenses like brokerage costs and any improvements made to the property.
Prakash Hegde, a Bengaluru-based chartered accountant, emphasizes that if you choose to assess the FMV as of 1 April 2001, any costs for improvements must have been incurred after that date. This provision can help taxpayers in Mumbai and across India ease some of the financial burdens associated with property sales.
Long-Term Capital Gains (LTCG) Tax Changes
Inherited properties are generally held for extended periods, classifying them as long-term capital assets. This classification places them under the long-term capital gains (LTCG) framework, which has seen some recent updates. The updated rules offer residents two choices: pay 20% tax with indexation benefits that account for inflation, or opt for a flat tax rate of 12.5%, which does not permit indexation.
Recent statements from Balwant Jain, a Mumbai-based tax and investment expert, underline the urgency to understand these changes: “From 23 July 2024, the indexation benefit on long-term capital gains has been largely withdrawn. The only exception is for land and buildings purchased before that date but sold afterward.” Resident individuals and Hindu Undivided Families (HUFs) may still choose between a flat 12.5% tax on unindexed gains or a 20% tax with indexation benefits.
Real-Life Scenario: Tax Calculations
Consider a relatable example to illustrate these tax implications: Imagine your father purchased a flat in 1998 for ₹10 lakh. When you eventually decide to sell this flat in March 2025, you can apply the FMV from April 1, 2001, which could be assessed at ₹20 lakh. As a result, your indexed cost would be around ₹72.6 lakh after adjusting for inflation. When deducting additional expenses like brokerage costs, your taxable gain would be approximately ₹45.4 lakh.
If you choose the 20% tax route, it translates to ₹9.08 lakh in tax owed. Opting for the flat 12.5% tax might increase your taxable gain to nearly ₹98 lakh, resulting in a tax bill of about ₹12.25 lakh. The calculations clearly reveal that choosing the indexation route can save significant amounts in taxes.
Finding Exemptions and Ways to Reduce Tax Liability
It’s important to note that there are options available to mitigate the tax burden when selling inherited property. If you reinvest the gains into another residential property within the designated timelines or invest in capital gains bonds as per Section 54EC or another property under Section 54F, you can claim exemptions. These provisions help individuals retain more of their inheritance rather than losing substantial amounts to taxes.
Jain points out, however, that “you need to invest the unindexed long-term capital gains to avail the tax exemption.” For residents in Mumbai and nationwide, navigating these complexities efficiently can ensure that the wealth passed on remains intact for future generations.
In conclusion, while selling inherited properties does entail capital gains tax, understanding the options available and leveraging the right strategies can make a considerable difference. Residents should meticulously evaluate which tax options serve them best, while NRIs need to remain vigilant about the flat 12.5% liability while still benefiting from the FMV advantages.
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Original source: www.livemint.com
