- Date : 04/07/2023
- Read: 3 mins
Knowledge is power when it comes to the taxation of ancestral property. So, discover tax benefits, capital gains, and more!
- Ancestral property refers to inherited properties from immediate paternal ancestors.
- Tax liability arises when selling ancestral property.
- Long-term gains are taxed at 20.8% and short-term at the slab rate.
- Tax benefits include reinvestment and construction options.
In India, any ancestral property holds immense significance as it is passed down through generations, symbolising family heritage and continuity. However, when it comes to taxation, specific regulations outlined in the Income Tax Act govern the tax liability of ancestral property. Let’s explore them in detail.
What is ancestral property?
An ancestral property encompasses any property inherited up to four generations in the male lineage, including the father, grandfather, and great-grandfather. Only properties inherited from immediate paternal ancestors are considered ancestral property for tax purposes, while those inherited from maternal ancestors do not qualify.
In accordance with an amendment in the Hindu Succession Act, since 2005, women also have equal rights to inherit ancestral property.
How is ancestral property taxed?
From a taxation perspective, only ancestral properties inherited from immediate paternal ancestors are taken into consideration. At the time of inheritance, no tax liability is imposed on the inheritor. However, when the inherited property is eventually sold, the capital gains arising from such a sale become taxable.
How to calculate income tax liability on the sale of ancestral property?
The income tax on the sale of ancestral property depends on the classification of the capital gains.
If the property is held for more than 24 months, it is classified as a long-term capital gain (LTCG) and taxed at 20.8% (including cess) with indexation. For properties held for less than 24 months, it is considered a short-term capital gain (STCG) and taxed at the applicable slab rate.
Also Read- Sold an asset recently? Understand how to calculate the capital gains.
How to calculate capital gains on the sale of inherited property?
Capital gains on the sale of inherited property are calculated as the difference between the sale consideration and the cost of acquisition.
For LTCG, the cost of acquisition is indexed using the below formula -
Indexed cost of acquisition = Acquisition Cost x CII of the year of transfer/CII of the acquisition year.
Here, the cost of acquisition is the cost incurred by the previous owner.
What are the tax benefits?
Tax exemptions are available on the gains from the sale of inherited property.
One option is to reinvest the gains into another property. To claim tax exemption for LTCG below Rs. 2 crores, reinvestment in a maximum of two, and if the gains exceed Rs. 2 crores, reinvestment in one residential property in India is required. Another option is to construct a house within three years using the gains. Additionally, investing in capital gains bonds under Section 54EC of the Income-tax Act, 1961, is possible, with an investment limit of Rs. 50 lakh per financial year.
Final thought
Any ancestral property holds cultural and financial significance. While no tax is levied at the time of inheritance, tax liabilities arise upon selling the property.
Find the latest articles on savvy women here.
Also Read- Selling alimony property? Don’t miss these income tax implications for divorcees!
Disclaimer- This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.
- Ancestral property refers to inherited properties from immediate paternal ancestors.
- Tax liability arises when selling ancestral property.
- Long-term gains are taxed at 20.8% and short-term at the slab rate.
- Tax benefits include reinvestment and construction options.
In India, any ancestral property holds immense significance as it is passed down through generations, symbolising family heritage and continuity. However, when it comes to taxation, specific regulations outlined in the Income Tax Act govern the tax liability of ancestral property. Let’s explore them in detail.
What is ancestral property?
An ancestral property encompasses any property inherited up to four generations in the male lineage, including the father, grandfather, and great-grandfather. Only properties inherited from immediate paternal ancestors are considered ancestral property for tax purposes, while those inherited from maternal ancestors do not qualify.
In accordance with an amendment in the Hindu Succession Act, since 2005, women also have equal rights to inherit ancestral property.
How is ancestral property taxed?
From a taxation perspective, only ancestral properties inherited from immediate paternal ancestors are taken into consideration. At the time of inheritance, no tax liability is imposed on the inheritor. However, when the inherited property is eventually sold, the capital gains arising from such a sale become taxable.
How to calculate income tax liability on the sale of ancestral property?
The income tax on the sale of ancestral property depends on the classification of the capital gains.
If the property is held for more than 24 months, it is classified as a long-term capital gain (LTCG) and taxed at 20.8% (including cess) with indexation. For properties held for less than 24 months, it is considered a short-term capital gain (STCG) and taxed at the applicable slab rate.
Also Read- Sold an asset recently? Understand how to calculate the capital gains.
How to calculate capital gains on the sale of inherited property?
Capital gains on the sale of inherited property are calculated as the difference between the sale consideration and the cost of acquisition.
For LTCG, the cost of acquisition is indexed using the below formula -
Indexed cost of acquisition = Acquisition Cost x CII of the year of transfer/CII of the acquisition year.
Here, the cost of acquisition is the cost incurred by the previous owner.
What are the tax benefits?
Tax exemptions are available on the gains from the sale of inherited property.
One option is to reinvest the gains into another property. To claim tax exemption for LTCG below Rs. 2 crores, reinvestment in a maximum of two, and if the gains exceed Rs. 2 crores, reinvestment in one residential property in India is required. Another option is to construct a house within three years using the gains. Additionally, investing in capital gains bonds under Section 54EC of the Income-tax Act, 1961, is possible, with an investment limit of Rs. 50 lakh per financial year.
Final thought
Any ancestral property holds cultural and financial significance. While no tax is levied at the time of inheritance, tax liabilities arise upon selling the property.
Find the latest articles on savvy women here.
Also Read- Selling alimony property? Don’t miss these income tax implications for divorcees!
Disclaimer- This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.
