Subsequent sale of inherited property and income tax
Once the property is inherited, the legal heir is the owner of the property and hence would be liable to tax on all income that accrues on the property. Similarly, in case the property is sold subsequently, any profits arising on such sale, would accrue to him and therefore must be offered to income tax by him in his return of income.
Interestingly, the law also provides that the period of holding for determining if an asset is a long term or short term, the holding period of the previous owner i.e. the deceased, should also be considered.
Here is a simple example that will give you an easy understanding of the law discussed in the above paras:
Mr Chauhan has purchased a flat in the year 2002 for Rs 30 lakhs. Upon his death, this house was inherited by his son Rahul in the year 2007. Such an inheritance would not have any tax implications.
After inheriting the house, Rahul let it out on a monthly rent of Rs 20,000. Such rental income must be offered by Rahul to tax under the head “Income from house property”
Rahul sold the flat in the year 2008 for Rs 45 lakhs. The gains made would be long-term as the property is a long-term asset because it has been held for a period of more than 2 years (holding period of Mr Chauhan also considered). Accordingly, Rahul can avail the benefit of indexation and is liable to pay tax on the net long-term gains at the rate of 20%. He may also choose to invest the proceeds as required by the income tax act to claim exemption on income from capital gains.