If you’re planning to sell ancestral property — be it land, a house, or any other real estate — one of your top concerns is likely tax liability. Many individuals inherit property from their parents or grandparents but hesitate to sell due to the long-term capital gains tax (LTCG) involved. Fortunately, there are legal and strategic ways to reduce or even avoid paying excessive taxes on such transactions.

Let’s break down how inherited property taxation works and how you can protect your profits.

Understanding the Tax Rules on Inherited Property

Inherited or ancestral property is not taxed at the time of inheritance. However, when you sell it, you are liable to pay long-term capital gains tax if the property has been held for more than two years.

Under current tax rules:

• With indexation (adjusting for inflation), the LTCG tax is 20%.

• Without indexation, it is 12.5%.

Calculating the cost of acquisition for ancestral property can be tricky, especially if the property has been in the family for decades. In such cases, it’s advisable to consult a tax advisor to determine the correct indexed cost and reduce your tax liability legally.

Smart Ways to Save Tax on Inherited Property Sale

There are specific sections under the Income Tax Act that allow you to save tax if you reinvest the capital gains:

✅ Section 54 – Purchase a New Residential Property

If you sell a residential property and invest the capital gains in another residential property within a stipulated time (1 year before or 2 years after the sale), you can claim exemption on LTCG under Section 54. This is one of the most common and effective methods.

✅ Section 54EC – Invest in Capital Gain Bonds

You can also save tax by investing in capital gains bonds issued by institutions like NHAI or REC under Section 54EC. The maximum limit for investment is ₹50 lakhs, and the lock-in period is 5 years. Experts suggest evaluating this option carefully, as sometimes paying the tax and investing the post-tax amount into financial goals may yield better returns.

Where Else to Invest and Save Smartly

After selling the property, you’ll likely have a large sum of money. Here’s how you can allocate it wisely for tax efficiency and future security:

1. Emergency Funds
   Keep an amount equivalent to 6 months of expenses in a high-interest bank FD (earning over 7.5%). This ensures liquidity.

2. Health Insurance
   Get a health cover of at least ₹1 crore. Combine a base cover of ₹5–10 lakh with a top-up policy to protect against medical emergencies.

3. Term Insurance
   Secure your family’s financial future with a term insurance plan that covers 20 times your annual expenses.

4. Diversified Mutual Fund Investments (SIPs)
   Invest the remaining proceeds in a 60:35:5 ratio via SIPs across:

   • Flexi-cap Funds (60%)

   • Multi-Asset Funds (35%)

   • Gold Funds (5%)
     This strategy over a 12–18 month period can help balance growth, stability, and tax efficiency.

Conclusion: Think Beyond Just Saving Tax

While minimizing tax on the sale of inherited property is important, your focus should also be on maximizing the long-term value of the proceeds. A balanced investment strategy — combining real estate reinvestment, bonds, insurance, and mutual funds — can secure your future while keeping tax bills low.

Remember: Ancestral property is a legacy — handle it with careful planning, not haste.