The tax angle to inherited land, building
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Similarly, an exception is also provided for capital gains taxation to the donor for transfer of IP under a gift or a will. Post inheritance, the IP becomes similar to any IP that the individual may own. Accordingly, if the recipient owns more than one IP (including inherited IP) and the same is not actually rented; one of the IPs can be chosen as self-occupied property which is not liable to tax. The individual will have to pay income tax on the deemed rental income for the other IPs (even if inherited).
Additionally, the recipient may also be liable to pay wealth tax on the specified value of the other IPs (even inherited) as per the current wealth-tax rules.
Subsequently, if the inherited IP is sold, the recipient would be subject to capital gains tax. The capital gains will be the difference between the sales consideration and cost of acquisition (including cost of improvements). Transfer costs (eg brokerage etc) borne by the seller are allowed as a deduction. In case of inherited IPs, the cost of acquisition is regarded as the cost of previous owner ie the donor. If the donor also had acquired the IP by way of inheritance or gift the cost of acquisition will be the cost for the last previous owner who had acquired the IP otherwise than as gift or inheritance. In either case, if such acquisition by the last previous owner is before April 1, 1981, the cost of acquisition can be regarded as the Fair Market Value of the property as on April 1, 1981.
The capital gains tax rate will depend on whether the property is short term (ie held for 36 months or less) or long term. For the purpose of computing the holding period, the period of holding by the previous owner is to be included. It will relate back to the last previous owner who had acquired the IP otherwise than as gift or inheritance. If the IP qualifies as long term asset not only the gains are taxed at a lower rate but the benefit of inflating the cost of acquisition (and improvements) for the purpose of inflation is available.
While inheriting IP may be a private family matter, appropriate and detailed documentation could be required to justify your claim for exemptions, period of holding etc. before the tax-authorities.
—The writer is ED, Tax, KPMG