ITR Filing 2024: How Are Ancestral Properties and Assets Taxed in India? Check Details

For ITR filing in July: According to the provisions outlined in the Income Tax Act of 1961, no tax liability is incurred upon the inheritance of assets, whether they are movable or immovable. However, a tax obligation arises if the subsequent owner chooses to sell the property. Upon an individual's death, their assets and belongings are typically transferred to designated legal heirs, such as offspring, grandchildren, or dependents.

In cases involving movable assets such as mutual funds, gold, shares, and similar items, the new possessor initially bears no tax burden. Often, acquired assets like real estate or investments generate income, such as rental payments or dividends, for the inheritor. Therefore, it becomes the responsibility of the inheritor to accurately report these earnings and fulfill the corresponding tax obligations. Importantly, tax liability arises only when the inheritor eventually sells these movable assets.

Sale of ancestral property:

According to Section 54 of the Income Tax Act (ITA), an individual can deposit the proceeds from the sale of a residential house property into the Capital Gain Account Scheme, 1988 ("Scheme") before filing the income tax return, and in any case not later than the due date for filing the original income tax return under section 139(1) of the ITA (typically July 31 of the assessment year).

The amount deposited under the Capital Gain Account Scheme, 1988, for the sale proceeds of a residential house property is considered as the cost of the new asset and qualifies for exemption under Section 54 of the Income Tax Act (ITA). However, if the deposited amount is not fully utilized for purchasing or constructing the new house property within the specified period, any unutilized portion will be taxable in the year when the three-year period from the date of the original asset's transfer expires. The taxpayer can withdraw the unutilized amount according to the provisions of the Scheme.

It's important to note that the maximum exemption amount under Section 54 is Rs 10 crore.

Taxation for NRIs:

When NRIs derive gains from the sale or transfer of ancestral or self-owned property, these are taxed under the head of "Capital Gains." Long-term capital assets (held for more than 24 months) are subject to capital gains tax at 20% (after indexation) under section 112 of the Income Tax Act. Short-term capital assets are taxed according to the applicable marginal slab rates for NRI investors.

"It's important to note that non-residents can avail themselves of long-term capital gains exemption under section 54 of the Income Tax Act by reinvesting the sale proceeds in acquiring or constructing another residential house property, and under section 54EC by investing in specified tax-saving bonds," said Suresh Surana, Founder of RSM India. "Since there are no separate rules for the taxation of house property in India for residents and non-residents, rental income earned from residential properties by NRIs is taxable under 'Income from house property.' This income can benefit from deductions such as municipal taxes paid by the owner and the standard deduction of 30%, along with interest on borrowed capital under section 24 of the IT Act."

However, it's important to note that non-residents may be eligible to claim treaty benefits under the Double Tax Avoidance Agreement (DTAA) between India and their home country.

The DTAA signed by India with various nations establishes predefined rates for withholding taxes on income paid to residents of those countries. This means that Non-Resident Indians (NRIs) earning income in India may be subject to Tax Deducted at Source (TDS) at rates specified in the relevant DTAA.

The Finance Act of 2021 introduced Section 89A to address double taxation concerns for NRIs with funds in foreign retirement accounts held in specified countries. This provision applies to "specified persons" — individuals who became residents of India, held accounts in notified countries while non-residents, and are now residents of those countries. The new rule specifies that such income will be taxed according to prescribed methods and timelines.

Regarding retirement benefits, a "notified account" is one established by an individual in a specific country to accumulate income. Income in such accounts is not taxed as it accrues but is taxed by the respective country upon distribution.