I am a UK resident and my brothers in India divided our father’s property, and I inherited some land parcels. I may transfer it to my son or sell it and repatriate the money to the UK. What will be the tax implication of inheriting and selling the properties? Will my son be liable to pay tax if I transfer it to him?
Income tax is levied on any sum of money, specified movable property or immovable property received without consideration (without a quid pro quo), except where it is received under a Will or inheritance or as a gift from a relative. Apart from spouse, relative includes brother or sister, brother or sister of the spouse, brother or sister of either of the parents, any lineal ascendant or descendant, any lineal ascendant or descendant of the spouse, spouse of any of the persons referred to above. Property inherited by you will not be taxable. Also, transfer of the property to your son as a gift will also not be taxable. However, any income arising from the transfer of inherited property to a non-relative or use of property will be taxable.
Sale of immovable property will be taxable in the year of the sale. Any immovable property held for over 24 months is classified as a long-term capital asset (LTCA). The holding period is calculated from the date of acquisition by the original owner.
In case of LTCA, taxable capital gains will be the net sale proceeds less indexed cost of acquisition, adjusted as per the Cost of Inflation Index (CII) less indexed cost of improvement. Long-term capital gains (LTCG) are taxable at 20% (plus surcharge and education cess). LTCG from the sale of land parcels can be claimed as exempt from income tax to the extent there is (a) reinvestment of LTCG in India in specified bonds notified by the government (within six months from the date of transfer) or (b) reinvestment of proceeds in a residential house in India (to be either purchased within one year before or two years after or constructed within three years of transfer of LTCA). For the exemption from income tax to continue, there are restrictions on the sale of the new house and the amount of investment made in specified bonds.
If the capital gain is not invested till the due date of tax return filing (31 July), you may deposit the capital gains in a Capital Gains Account Scheme (not later than the due date of return filing) and subsequently withdraw the amount for reinvestment in a new residential house within the stipulated period. If the entire amount is not reinvested or not deposited in the scheme, the remaining portion of the capital gains will be taxable.
Tax on capital gains can be either paid by way of advance tax in four instalments or before filing of tax return by way of self-assessment tax along with interest. The requirement to pay advance or self-assessment tax will arise if the buyer of the property does not deduct full tax payable by you.
If the seller qualifies as non-resident during the relevant financial year, the buyer is required to deduct TDS (tax deducted at source) at a specified rate on taxable capital gains on the sale of immovable property. The specified rate is 20% (plus applicable surcharge and health and education cess) in case of LTCG and 30% (plus applicable surcharge and health and education cess) in case of short-term capital gains.
Sonu Iyer is tax partner and people advisory services leader, EY India. Queries at firstname.lastname@example.org