When it comes to inheritance, one of the most common questions taxpayers face is whether they need to declare inherited property in their Income Tax Return (ITR).
Many individuals receive houses, land, or other valuable assets from their parents or grandparents, but not everyone is clear on the taxation rules. Let’s break it down with expert insights and the latest Income Tax provisions.
Inheritance and Taxability
Tax expert Balwant Jain explains that if you inherit a property-whether from your parents, grandparents, or even under a will-you are not required to pay tax on the inheritance itself. The Income Tax Act specifically excludes inherited property from taxable income.
According to Section 56(2)(x) of the Income Tax Act, if the total value of gifts received in a financial year exceeds ₹50,000, it is considered taxable income. However, gifts or assets received through inheritance or a will are exempt from this rule. This means that even if you inherit a property worth several lakhs or crores, there is no immediate tax liability.
Real-Life Example: A ₹50 Lakh House Inherited
Take the case of Shubham Shukla from Meerut, who inherited a house worth ₹50 lakh from his father in June 2024. He already owns another residential property and wanted to know if the new property must be disclosed in his ITR.
As per Jain, Shubham does not need to declare this property in his ITR solely because it was inherited. Since inheritance is not treated as income, there is no requirement to report it under normal circumstances.
When Tax Comes Into Play
While inheriting a property is tax-free, selling it in the future is a different story. If Shubham decides to sell the inherited house and makes a profit, he will be liable to pay capital gains tax. The profit will be calculated based on the original purchase price paid by his father (indexed for inflation), not the market value at the time of inheritance.
Thus, the tax liability arises only upon sale, not at the time of inheritance.
Mandatory Disclosure for High-Income Taxpayers
The rules change if your total annual income crosses a certain threshold. From Financial Year 2024-25, individuals earning more than ₹1 crore in a year must provide detailed disclosures of their assets and liabilities in Schedule AL of their ITR. Earlier, this limit was ₹50 lakh.
Therefore, if Shubham’s annual income exceeds ₹1 crore, he will be required to report details of both movable and immovable properties in his ITR, including the inherited house.
Which ITR Form to Use
Since Shubham now owns more than one house property, he cannot file ITR-1 (Sahaj). He will have to use ITR-3, which is meant for individuals and Hindu Undivided Families (HUFs) having income from business, profession, or multiple house properties. Even if he is eligible for the presumptive taxation scheme under Section 44ADA (commonly used by doctors, lawyers, and professionals), his multiple house ownership makes ITR-3 mandatory.
Key Takeaways
- Inheritance is tax-free: Properties received from parents or grandparents are not considered taxable income.
- Tax applies on sale: If the inherited property is sold, capital gains tax must be paid on the profit.
- High-income disclosure: Those earning above ₹1 crore annually must declare all assets and liabilities, including inherited property, in Schedule AL.
- Correct ITR form: Multiple house owners must file ITR-3, even if eligible for simpler forms under other provisions.
Final Word
Inheriting a property worth ₹50 lakh or more does not attract any immediate tax liability, nor does it generally require disclosure in your ITR unless your income exceeds the ₹1 crore threshold. However, you should always maintain proper documentation of inheritance for future use, especially in case of a sale or dispute. Consulting a tax professional can help ensure compliance and avoid penalties.