Properties received under a Will do not have any tax implications for legal heirs
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I am in the process of writing my Will for distributing house properties. Will my heirs have to pay taxes for the assets that they receive after my death?
As your legal heir will receive the properties under a Will, there should not be any tax implications in your legal heirs’ hands at the time of receiving the properties.
With respect to the above, it would be prudent to have appropriate documentation (i.e., Will) in place to substantiate the transaction.
Any income arising at a later point in time from the property (i.e., rental or deemed rental or capital gains, from sale of the property) shall be taxed in your heirs’ hands.
As per the current provisions, if the total income of your legal heir exceeds Rs50 lakh during the relevant financial year (FY), then she would be required to disclose the cost of each of the house properties inherited under the Will in the schedule asset liabilities (AL).
The cost of the house property shall be considered as the one at which the original owner had acquired it, other than under a Will or inheritance.
Further, the cost should be increased by the cost of improvement, if any.
In 2000, I and my sister jointly bought a house in Delhi. I paid the down-payment and she took the home loan. The loan is a joint one—we are co-borrowers—but she has been paying the equated monthly instalments (EMIs) and availing the related income tax benefit as well.
Now our plan is that I sell my share to her so that she is the sole owner of the house, and the sole borrower of the home loan. Will this change in ownership entail taxes?
We understand that the house has been jointly acquired by you and your sister. As per the income tax laws, your share will be determined based on the ratio of funding of the cost of the property.
If you sell your share in the house property to your sister, it will be regarded as transfer of asset and hence the gains, if any, arising from the sale of your share of the said house property will be taxable as ‘capital gains’ in your hands.
Since the house has been acquired and held for more than 36 months from the acquisition date, the resulting gains shall be classified as long-term capital gains (LTCG).
The cost of acquisition and improvement, if any, incurred by you, made subsequent to the purchase of the house should be increased using the applicable cost inflation index (CII) notified by the income tax department with respect to the FY of purchase and the cost of improvement, if any and the FY of the sale.
The LTCG should be computed as the difference between net sale proceeds and your indexed cost of acquisition and improvement.
You can avail an exemption from LTCG tax by reinvesting the LTCG in a new residential property located in India, within the prescribed time limit under section 54 of the Income-tax Act, 1961.
You could also invest the LTCG in the bonds notified under section 54EC of the Act. The investment should be made within 6 months from the sale date, subject to a threshold of Rs50 lakh.
Just for your information, if the sale proceeds receivable from sale of house are less than the value adopted for payment of stamp duty, then for computing the capital gains, the value as assessed for the purpose of payment of stamp duty shall be considered as the sale value.
Further, stamp duty and registration fees will have to be paid in relation to the transfer of your share in the house property and the same have to be appropriately documented to substantiate transfer of share in the house.
If your sister’s total income exceeds Rs50 lakh during the relevant FY, and hence the schedule AL is applicable to her, she will have to report the cost of the entire house property (including your acquired share in the house) in her personal tax return.
Parizad Sirwalla is partner (tax), KPMG.
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