Inheritance Tax or Capital Gains Tax in India 2024: A Detailed Guide
By Anurag (Director, Taxellence Consultants India Private Limited )
India’s taxation system is ever-evolving, and when it comes to inherited wealth and capital gains, there are some important aspects you need to be aware of.
This blog aims to provide a comprehensive overview of the current laws related to inheritance or capital gains taxation in India for 2024, referencing the Income Tax Act, 1961.
We’ll dive into the tax implications of inheritance or capital gains in 2024
Inheritance Tax in India: What You Need to Know in 2024
India no longer imposes an inheritance tax. The Estate Duty Act, which taxed the transfer of wealth upon a person’s death, was abolished in 1985. This means when you inherit property, shares, or other assets in India, you do not have to pay any direct tax on the inheritance itself.
This is not the end of the story.
Capital Gains Tax on Inherited Assets:
Even though there’s no inheritance tax, you may still face a significant tax burden when you decide to sell the inherited assets.The Income Tax Act, 1961, imposes capital gains tax on the profits earned from selling property, shares, or other inherited assets.
Types of Capital Gains
Long-Term Capital Gains (LTCG): If the inherited asset is held for more than 36 months before selling (for immovable property), the gains are considered long-term and taxed at 20% with indexation benefits. Indexation allows you to adjust the acquisition price of the asset for inflation, which can significantly reduce your tax liability.
Short-Term Capital Gains (STCG): If you sell an inherited property or asset within 36 months of acquiring it (for immovable property), the gains are considered short-term and taxed at your applicable income tax slab rate.
- For financial assets like shares and mutual funds:
- The holding period to qualify for long-term capital gains is 12 months.
- Long-term capital gains on equity shares are taxed at 10% if they exceed ₹1 lakh in a financial year.
How Capital Gains Tax Applies to Inherited Assets
While inheriting assets itself is not taxable, selling them is. Here’s how capital gains tax applies to different categories of inherited assets:
Inherited Property (Land, House, etc.)
If you inherit a property and later sell it, capital gains tax will be applicable based on the sale price minus the indexed cost of acquisition.
Cost of Acquisition: Inherited assets are considered to be acquired at the cost the original owner (deceased person) paid. If the property was acquired before April 1, 2001, the fair market value (FMV) as of April 1, 2001, can be considered.
Indexation: For long-term capital gains, the purchase price is indexed to account for inflation. The Cost Inflation Index (CII), updated annually by the government, is used to compute the indexed acquisition cost, which helps reduce tax liability.
2. Inherited Shares and Securities
For shares, mutual funds, or other financial securities, capital gains tax is calculated similarly, the holding period for listed securities to qualify as long-term is 12 months.
- Long-Term Capital Gains (LTCG) on equity shares or equity-oriented mutual funds are taxed at 10% if gains exceed ₹1 lakh in a financial year.
- For debt-oriented funds, LTCG beyond 36 months is taxed at 20% with indexation benefits.
How to Calculate Capital Gains Tax on Inherited Assets in 2024
The formula to calculate capital gains for inherited property is:
Steps to Calculate Capital Gains:
Determine the Cost of Acquisition: If the asset was bought by the deceased after 2001, use the actual purchase price. If bought before April 1, 2001, use the FMV on April 1, 2001.
Apply Indexation: Multiply the original purchase price by the ratio of the CII in the year of sale to the CII in the year of acquisition. The Cost Inflation Index for FY 2023-24 is 348.
Subtract Indexed Cost from Sale Price: The difference is the capital gain, and if it’s long-term, a 20% tax will apply on this amount.
Example of Capital Gains Tax on Inherited Property:
Let’s say you inherit a property that was bought by your parents in 1995 for ₹10 lakh. You sell this property in 2024 for ₹1.5 crore.
- Fair Market Value on April 1, 2001: Assume ₹30 lakh.
- Indexed Cost of Acquisition:
Capital Gains: ₹1.5 crore (Sale Price) - ₹1.04 crore (Indexed Cost) = ₹46 lakh
The capital gains tax at 20% on ₹46 lakh would be ₹9.2 lakh.
Special Provisions and Exemptions for Capital Gains Tax in India (2024)
India offers certain exemptions to reduce the burden of capital gains tax under Sections 54, 54F, and 54EC of the Income Tax Act:
Section 54: Exemption on Sale of Residential Property
- If you sell an inherited residential property and reinvest the gains in another residential property within a stipulated period (2 years from sale, or 3 years if under construction), you can claim a tax exemption.
Section 54F: Exemption for Non-Residential Property
- For the sale of non-residential assets, if the capital gains are reinvested in a residential property, the entire capital gains or the proportional investment in the new property can be exempted from tax.
Section 54EC: Exemption on Investment in Bonds
- You can invest the gains in specific government bonds (like NHAI or REC bonds) within 6 months of sale and claim an exemption on the capital gains up to ₹50 lakh.
Section 54B: Exemption on capital gains from transfer of land used for agricultural purposes
- The land sold must have been used for agricultural purposes for at least two years.
- Individual and HUF against Capital Gain Arising from Transfer of Agricultural Land by investment of Capital Gain amount in another land or in Capital Gains Deposit Account Scheme.
Section 54D: Capital gains on the transfer of land and building used for the industrial undertaking
- Capital Gain arising from the transfer, by way of compulsory acquisition under any law, of land or buildings forming part of an industrial undertaking belonging to the assesses are Exempt,
Capital Gains Accounts Scheme (CGAS), 1988
- The holding period for classifying the assets will be 12 months and 24 months for short-term and long-term capital assets. Holding 36 months has been removed.
- The holding period for all listed securities is 12 months. All listed securities with a holding period exceeding 12 months are considered Long-Term. The holding period for all other assets is 24 months. Thus, land held for more than 24 months is considered long-term.
- The tax on long-term capital gains on other financial and non-financial assets is reduced from 20% to 12.5%. While on the other hand, the indexation benefit that previously was available on sale of long-term assets, has now been done away with. So, any sale of land made from 23rd July 2024 will attract a tax rate of 12.5% only without indexation benefit.
- Short-term capital gain on sale of land shall continue to attract tax at slab rates.
While India has no inheritance tax, the sale of inherited assets brings capital gains tax into the picture, the capital gains tax system is designed to tax profits made from selling inherited assets.
As the laws evolve, it’s important to stay updated on changes in the Income Tax Act, 1961, and seek professional guidance when dealing with complex tax situations involving inherited property or assets.
Understanding how these taxes work and taking advantage of exemptions can help you significantly reduce your tax liability.
By planning well, you can significantly reduce your tax liabilities and make the most of your inherited wealth.
With Taxellence Consultants by your side, you can rest assured that your financial future—and that of your heirs—is in expert hands., Taxellence Consultants India is here to guide you every step of the way
