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If a house is inherited from a grandfather and later rented out, the rent is taxable. Interest from inherited bank accounts is also taxed as income from other sources
Selling inherited land or a house will attract capital gains tax. (Representative/Shutterstock)
Despite well-defined property laws in India, disputes over ancestral or inherited assets remain widespread, frequently resulting in long-drawn legal battles. Ancestral property typically refers to assets passed down from parents, grandparents, or other relatives, or acquired through a will. A key question that often arises is whether such inherited property is subject to tax.
Inheritance Tax Abolished In India
Inheritance tax was once applicable in India but was abolished in 1985. As a result, property inherited from parents, grandparents, or through a will is no longer subject to tax. Under the previous law, the tax rate on inherited property could go as high as 85%, but this provision has since been removed.
What Does The Income Tax Act Say
Under the Income Tax Act, 1961, property inherited from a deceased individual is not treated as income and is therefore not taxable at the time of inheritance. However, any income generated from the inherited property—such as rental income, capital gains from a sale, or interest earned from an associated bank account—is subject to tax under the applicable provisions.
Tax Implications On Rental Or Interest Income
If an individual inherits a house from a grandfather and later rents it out, the rental income becomes taxable. Similarly, if the inherited assets include a bank account that generates interest, the interest earned is also subject to tax.
Capital Gains Tax On Property Sale
Selling inherited land or a house will attract capital gains tax. The tax calculation is based on the original owner’s purchase date, not the sale date. Holding the property for more than two years results in long-term capital gains, taxed at 20% with certain exemptions. Conversely, selling within two years results in short-term capital gains, taxed according to one’s income slab.
Tax-Free Inheritance, But Taxable Income
Inherited property itself is exempt from tax. However, any income derived from that property—whether rent, interest, or profit from sale—will be taxed. Understanding the tax rules concerning the legal use, income, and sale of inherited property can help avoid future legal complications.
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