Succession-related tax disputes frequently arise because the legal ownership, sale deed, banking trail, TDS records and income-tax returns do not correspond with one another. Families should therefore identify and document each heir’s share before the property is sold and ensure that the entire transaction is reported consistently across all legal and tax records.
Allocation of Tax Liability Among the Heirs
Once a property passes to the legal heirs under a Will or the applicable succession law, each heir acquires the share determined under that instrument or law. Where the heirs jointly sell the property, each heir is ordinarily liable to pay capital-gains tax in proportion to his or her ownership share. This position does not change merely because the entire sale consideration is credited to one heir’s bank account.
Nevertheless, such an arrangement may result in tax-reporting mismatches. The ownership stated in the succession and partition documents should, therefore, correspond with the sale deed, receipt of consideration and PAN-wise deduction of tax.
Determination of Capital Gains
For an inherited property, the heir generally adopts the original cost incurred by the previous owner, together with eligible improvement costs and subject to the provisions of the Income-tax Act. Each heir computes capital gains based on their proportionate share of the sale consideration, acquisition and improvement costs, and transfer expenses.
The previous owner’s holding period is also included, and for property acquired before April 1, 2001, the prescribed fair market value as on that date may be adopted as cost of acquisition. In the case of land or building or both, such fair market value cannot exceed the stamp duty value of the property as on 1 April 2001.
Where the sale consideration is below the stamp-duty value, the stamp duty value may be deemed to be the sale consideration, subject to the prescribed tolerance and valuation safeguards.
Capital-gains tax relief
Capital-gains tax exemptions are determined separately for each heir based on their respective share of the gain and reinvestment. Depending on the asset and proposed investment, an heir may consider exemptions for investment in a residential house, specified bonds or agricultural land under Section 82 to 88 of the Income Tax Act 2025 (corresponding to the Section 54 series of the Income Tax Act 1961).
Each legal heir must independently satisfy the prescribed limits, timelines and conditions, supported by appropriate evidence of funding, payment, ownership and reinvestment. An investment made by one heir cannot ordinarily support an exemption claim by another.
A brief about how to claim capital gain tax relief under Section 54
Section 82 of the Income-tax Act, 2025 (Section 54) provides that where a taxpayer derives long-term capital gains from the sale of a residential property, such gains shall be exempt to the extent they are reinvested in the acquisition of another residential house property in India.
The Section applies where an individual or HUF earns long-term capital gains from the sale of a residential house property (i.e., a building or land appurtenant thereto, chargeable under the head Income from house property). To claim exemption, the taxpayer must reinvest the capital gains in a new residential house property situated in India, within the prescribed timelines:
- Purchase of a new house property within 1 year before or 2 years after the date of transfer or
- Construction of a new house property within 3 years from the date of transfer.
It is pertinent to note that the tax exemption is limited to the cost of the new asset where the capital gains exceed such cost, with the balance remaining taxable. However, where the capital gains are equal to or less than the cost of the new asset, the entire amount of such gains shall be exempt.
Further, the benefit under Section 82 is subject to a monetary threshold, whereby the maximum amount of capital gains eligible for exemption is capped at Rs 10 crore. Any capital gains exceeding this limit would remain taxable in accordance with the applicable provisions.
Section 82 of the Income Tax Act, 2025 highlights certain important points that are relevant from a tax planning and compliance standpoint. Surana shares some of the key points are outlined below –
- Option to invest in two residential houses – Where the capital gains do not exceed Rs 2 crore, the taxpayer may, at their option, invest in two residential houses in India instead of one. However, this option can be exercised only once in a lifetime.
- Lock-in period and withdrawal of exemption – If the new property is transferred within 3 years, the earlier exemption is effectively withdrawn through adjustment in the cost of acquisition, leading to higher taxable capital gains.
- Capital Gains Account Scheme (CGAS) – If the capital gains are not fully utilised before the due date of filing the return of income u/s 263(1) of the Income Tax 2025 (corresponding to section 139(1) of Income Tax Act, 1961), the unutilised amount must be deposited in a notified CGAS with a specified bank or institution.
Such deposit in CGAS is deemed to be utilised for the purpose of claiming exemption, subject to actual utilisation within the prescribed period. Any unutilised amount after the expiry of 3 years becomes taxable in the year in which such period lapses.
Income-tax Return (ITR) and documentation
Each heir should disclose his or her proportionate share of the transaction in the capital-gains schedule of the applicable income-tax return. An individual without business or professional income would ordinarily file ITR-2, whereas ITR-3 or ITR-4 may apply where such income is also earned.
The income tax return should correctly disclose the heir’s share of the sale consideration, stamp-duty value, historical cost, improvement expenditure, transfer expenses and exemption claimed.
The tax deducted at source (TDS) should also be reported against the PAN of each seller in accordance with the respective ownership share. Different withholding requirements may apply where any heir is a non-resident.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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