Selling Inherited Property? Here are Hacks to Reduce Capital Gains Tax on Inherited Property

In India, when someone inherits an old property, like a flat or house, and later sells it, he/she need to pay tax on the profit made on the sale, called capital gains tax. However, there are a few smart hacks that one can reduce the capital gains tax burden. Below is the list of these smart hacks:

Tax Rules for Inherited Property

Cost of Property (Cost of Acquisition):

When you sell inherited property, the “cost” used to calculate your capital gains tax is not what you paid for it as an heir; instead, you use the initial purchase price paid by the person from whom you inherited the property.

Fair Market Value (FMV) of 1 April 2001:

If the initial property was bought before April 01, 2001, as an heir, you are not required to consider the initial purchase price of inherited property to calculate capital gains tax. Instead, you can use the Fair Market Value (FMV) as of 1 April 2001. Generally, FMV is higher than the initial price of inherited property, which ultimately reduces the taxable profit.

Indexation Benefit:

If the initial property was bought before July 23, 2024, you have the option to apply indexation on the FMV. Indexation is a way to adjust the cost of the property for inflation over time. This means your cost price goes up with inflation, lowering your capital gains and therefore reducing your taxable capital gain.

Adding Improvement and Broking Costs:

You can also add the cost of any improvements made to the property, like renovations, and broking agent fees paid while selling the property to the cost. This ultimately reduces capital gains tax.

• Note: If you are using FMV as of 1 April 2001, you can only include improvement costs incurred after this date.

Important Points to Remember

• Indexation is only available for resident Indians. If you are a Non-Resident Indian (NRI), you cannot claim indexation benefits.
• The FMV option is available for all taxpayers, whether resident or NRI.

For instance, suppose your father purchased a flat in 1998 for Rs. 10 lakh. The Fair Market Value (FMV) of the flat was Rs. 20 lakh. Later, you, as the legal heir, sell that flat in March 2025 for Rs. 1.2 crore; for that, you pay Rs. 2 lakh as broking fees to the agent. Now, under this condition, there are two ways to calculate your capital gains tax:

Option 1: Without Indexation

• Capital gain = Sale price – Cost – Brokerage = Rs. 1.2 crore – Rs. 20 lakh – Rs. 2 lakh = Rs. 98 lakh.

The tax rate on long-term capital gains (LTCG) here is 12.5%. So, tax payable is 12.5% of Rs. 98 lakh, i.e., Rs. 12.25 lakh.

Option 2: With Indexation (Lower Taxes)

Now, apply indexation on FMV to adjust for inflation from 2001 to 2025.

• Capital gains = Sale price – Indexed cost – Broking = Rs. 1.2 crore – Rs. 72.6 lakh – Rs. 2 lakh = Rs. 45.4 lakh.

The LTCG tax rate with indexation is 20%. So, tax payable is 20% of Rs. 45.4 lakh, i.e., Rs. 9.08 lakh.