The Inheritance Tax was in the news a few months ago, amidst speculation about the government reintroducing it in the 2019 Budget. However, the government decided against it. A lot of developed countries like the UK, USA, etc. still levy the Inheritance Tax. The inheritance tax was scrapped in India in 1985. Thus, any property or amount that you inherit from your parents will not be taxed when the transfer occurs. Although an inheritance is a transfer of value without consideration, it does not fall under 'gift' as per income tax laws. However, there are other ways in which an inheritance becomes taxable.

1. Tax levied on income received from inheritance:Inherited property, whether it is a house or land or an investment, is often a source of income in the form of rent or interest. The tax you pay on income received from inheritance will be as per the prevailing tax slabs applicable to you. For example, Rahul's father owns a house and earns a rent of ₹.50,000 per month from it. Upon the father's death, ownership of the house is transferred to Rahul. Now, Rahul does not have to pay any tax for this transfer. However, his income received from the inheritance of ₹50000 a month becomes taxable.

2. Tax on sale of inheritance:If you sell an inherited property, you become liable for capital gains tax in India.

What is capital gains tax in India? Capital gains tax is a tax levied on income from the sale of buildings, land, house property, trademarks, patents, vehicles, leasehold rights, jewellery and machinery, with certain exceptions and specifications. There are two types of capital gains tax in India- long term and short term. Generally, an asset which you have had for less than 2 years would be a short term asset, and one you have had for more than 2 years would be a long term asset. There are two different tax rates for both.

How does this apply to the sale of inheritance? In case of a sale of inherited property or asset, the holding period is counted as the duration for which both the original owner and the inheritor have held the asset. Based on this period, it is decided whether the asset is long term or short term. For example, Rahul's father had owned the house for 10 years, and it has been 6 months that his son has held it after his death. For Rahul, there will be no Inheritance Tax. But selling the house would attract a long term capital gains tax as the holding period is 10 years and 6 months. He can also take benefit of indexation on net long term gains. Under Section 54, he can also be exempt from tax if he purchases another property with the proceeds. If you have inherited any property or are expected to inherit in the future, make sure you are aware of the tax implications.