Understanding Tax Implications for Ancestral Properties in 2024

Generations pass down the property. For example, from a grandfather to your father and then to you. It goes by the name of an ancestral property. Ancestral property has specific tax implications. It's crucial to know each rule. This knowledge will help you file your income tax return in July 2024.

ITR filing in July 2024

The Income Tax Act of 1961 has provisions about the tax on ancestral property. The act defines it. You have no tax obligation if you inherit property, be it movable or immovable. When someone dies, their property will pass to their chosen legal recipient. This could be their children, grandchildren, or dependents.

When do you have to fulfill your tax obligations?

You have to fulfill the tax obligation as soon as you sell the property and generate revenue from that sale. The Income Tax Act of 1961 states that a person is exempt from tax only if he does not choose to sell a property. As soon as you opt to sell your inherited property. You will have to fulfill all provisions about the tax obligations. 

In which scenarios are you exempt from paying the tax?

You are exempt from taxes if you acquired mutual funds, gold, shares, and other investments. The new owner enjoys tax exemption from the start. But if you generate revenue from real estate, such as rentals and the sale of a property. You will have to fulfill the tax implications specified by the act. So, the beneficiary must fulfill these obligations to align with the legal liabilities.

Tax on the sale of an ancestral property.

ITA Section 54 lets people save on taxes. They do this by selling a house and using the money to buy or build another. Here’s how it works with an example:

Understanding Section 54 with an example:

Scenario

Let’s say Mr. A sells his residential house property and makes a profit of Rs. 50 lakh (we term this profit as a capital gain). As per Section 54, if Mr. A buys or builds another house with the profit, he can save on capital gains tax.

Conditions and Benefits:

1. Time Limit for Reinvestment: Mr. A needs to either buy a new house or start building one soon. He must do so to claim the exemption.
2. He should buy the new house within one year before or two years after the sale of the original property.
3. If you sell the original property, you should build a new house. Do it within three years.
4. Under Section 54, the exemption limit is the greatest amount that one can exempt, and it is Rs. 10 crore.
5. The Capital Gain Account Scheme (CGAS) is for Mr. A. He has not yet bought or started building the new house before filing his taxes. He can deposit the capital gains amount into a CGAS before the tax deadline, usually July 31. Consider this deposited amount as if it is being used to buy or build a new house.

Mr. A's capital gain within this limit makes him eligible for exemption. He can claim a tax-free amount. Mr. A deposits the gains into the CGAS. However, he does not use them to buy or build a house. Consequently, the tax authorities will tax the unspent amount.

The time is three years from the sale of the original property. Still, he can withdraw this unutilized amount from the CGAS.

Example:

Let’s apply this to Mr. A’s case:

Capital Gain: Rs. 50 lakh rupees.

Mr. A finds a new house worth Rs 80 lakh. He buys it within one year of selling his original property.

Since Mr. A has reinvested the entire capital gain of Rs. 50 lakh into purchasing the new house (which costs Rs. 80 lakh), he can claim an exemption on the whole capital gain amount of Rs. 50 lakh. Thus, he won’t have to pay any capital gains tax on this amount.

Section 54 of the ITA provides a tax exemption. It's for people selling a home and reinvesting the money in a new home. The key points are:

       •  The time limits for reinvestment.
       •  The use of the Capital Gain Account scheme for temporary parking of funds.
       •  The greatest exemption limit is ?10 crores.
       •  The tax implications if the reinvestment conditions are not met.

Taxpayers streamline tax management during property transactions with this tool.

Tax Obligations for Non-Resident Indians

NRIs in India pay tax on gains from selling property as capital gains. If you've owned the property for over 24 months, it's long-term and taxed at 20%. This rate is after adjusting for inflation. Your income tax slab determines the taxation of short-term gains. Non-Resident Indians can avoid taxes on long-term gains by reinvesting.

They can do so in another home (Section 54) or specified bonds (Section 54EC).Tax authorities tax rental income from Indian properties as "income from house property." They deduct municipal taxes. Then, they apply a 30% standard deduction and deduct loan interest.NRIs may enjoy Double Tax Avoidance Agreements (DTAA).

These agreements are between India and their home countries. This agreement sets tax rates in advance. NRIs help avoid double taxation on the same income. 

How to claim DTAA benefits?

NRIs can claim DTAA benefits. They can use deduction, exemption, or tax credit methods. The method depends on the terms of the agreement and their situation. This simplifies tax duties. It ensures fair treatment across borders for NRIs. They have income in both India and their home country.