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Are sale proceeds received from inherited property taxable?

The value of any asset received under a will or by way of inheritance is not taxable in India. However, the income arising from transfer or use of inherited property in India will be taxable in IndiaPremium
The value of any asset received under a will or by way of inheritance is not taxable in India. However, the income arising from transfer or use of inherited property in India will be taxable in India

  • The value of any asset received under a will or by way of inheritance is not taxable in India. However, the income arising from transfer or use of inherited property in India will be taxable in India

I am a citizen of Australia, but of Indian descent. My three siblings have decided to sell the inherited family home in India and share the proceeds with me. I want to repatriate my share of this to Australia. Do I have to pay tax on my share in India. If so, how much will this be? Can I opt to pay tax in Australia instead?

Name withheld on request

Under the income-tax (I-T) law, the value of any asset received under a will or by way of inheritance is not taxable in India. However, the income arising from transfer or use of inherited property in India will be taxable in India.

Sale of immovable property will be taxable in India in the year of sale of property. Any immovable property held for a period of more than 24 months is classified as long-term capital asset. For inherited property, the holding period would be calculated from the date of acquisition by the original owner.

Further, the cost of the property will also be reckoned with reference to the cost incurred by the original owner. If the property was acquired by the original owner prior to 1 April 2001, the cost can be substituted with fair market value (but not exceeding the stamp duty value on 1 April 2001) if such fair market value is higher than the original cost. The cost of improvement i.e., capital expenditure incurred for making additions or alterations to the property incurred after 1 April 2001 by the original owner or taxpayer can also be considered in the computation of capital gains in such transfer.

In case of a long-term capital asset, the taxable capital gain will be full value of consideration less expenditure incurred wholly and exclusively in connection with such transfer less indexed cost of acquisition (actual cost of acquisition adjusted as per cost of inflation index (CII)) less indexed cost of the improvement.

The long-term capital gain (LTCG) is taxable at 20% (plus applicable surcharge and health & education cess).

A caution point here: if the stamp duty value of the property is more than 10% of sale value, the stamp duty value may be regarded as the full value of consideration receivable for computation of capital gains.

The LTCG from sale of residential property can be claimed as exempt from Income tax to the extent the capital gains are being reinvested in “specified bonds" in India

If the LTCG remains un-invested till the due date of filing of India tax return (31 July), there is an option to deposit the amount of capital gain in a Capital Gains Account Scheme (not later than the due date of filing the India tax return) and subsequently withdraw this amount for reinvestment in the new residential house within the stipulated period (2 years/3 years, as the case may be).

If the entire amount is not reinvested or not deposited in the scheme, the remaining portion of the LTCG will be taxable.

Thus, your share of capital gains on the sale of immovable property in India will be taxable in India if not claimed as exempt from Income-tax to the extent the capital gains are reinvested in India .

You cannot choose to pay tax in India or Australia. If you qualify as a resident of Australia and if such income on the sale of immovable property is also taxable in Australia, you may claim the foreign tax credit in Australia for taxes paid in India against doubly taxed income as per the applicable provisions of the Double Taxation Avoidance Agreement (DTAA) between India and Australia.

Tax on LTCG can be either paid by way of advance tax in four instalments (15% by 15 June, 45% by 15 September, 75% by 15 December and 100% by 15 March) or before filing of a tax return by way of self-assessment tax along with interest by 31 July.

The requirement to pay advance/self-assessment tax will arise if the buyer of the residential property does not deduct full tax payable by you.

Sonu Iyer is tax partner and people advisory services leader, EY India.

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