Reddit user says mother received ₹50L cash from inherited property sale; experts explain ITR rules, possible penalties

A Reddit user recently claimed that their mother inherited a property from her own mother and later sold it to a builder who allegedly insisted on making the payment in cash. According to the post, the family is now holding ₹50 lakh in cash with no banking trail for the sale consideration, although they possess the property documents related to the transaction.

“She sold it to a builder who insisted on paying in cash. She was alone during the dealing, didn’t know better, and ended up accepting ₹50 lakh in cash,” the user wrote in the social media post.

The person sought advice from other Redditors on how the amount should be declared in the income tax return (ITR) and what taxes would be applicable on the transaction. Here’s what experts have to say about the situation.

How to report this transaction in ITR?

The sale of an inherited property should be reported under the ‘capital gains’ schedule in the income tax return (ITR), and not as ordinary income, advised two tax experts who spoke to Mint.

Assuming the taxpayer had no other sources of income during the financial year, the return form will depend on the nature of earnings reported from the sale and the other disclosures required. Since the return contains only capital gains, ITR-2 is the relevant form for the taxpayer in question.

Capital gains on inherited property

For inherited property, the date and cost of acquisition of the previous owner are considered for tax purposes.

In such cases, the taxpayer steps into the shoes of the previous owner, so the original purchase cost of the deceased owner is treated as the base cost, and if the asset was acquired before the applicable cutoff, the fair market value rules may apply instead, said Chandni Anandan, tax expert at Cleartax.

“The holding period of the original owner is also added to the taxpayer’s holding period to determine whether the gain is long-term or short-term. In practice, inherited property is very often treated as a long-term capital asset, and the gain is computed by taking the sale consideration minus cost of acquisition and other eligible transfer expenses, subject to the applicable law for that year.” she added.

Additionally, indexation benefits are also available to resident individuals when the immovable property is purchased on or before 23rd July 2024. It must be noted that when indexation benefits are claimed, the capital gains are taxable at a flat rate of 20%, as compared to the 12.5% long-term capital gains tax rate without indexation.

Why large cash transactions may attract scrutiny?

Any transaction done in cash can create scrutiny risk, even if the taxpayer has the sale document. This is because cash receipt violates the provisions of the Income-tax Act which restricts specified cash transactions, according to Gaurav Makhijani, Managing Partner at MGA.

“The parties involved will face penal consequences. The fact that the buyer insisted on cash is generally not regarded as a valid legal defence against such violations,” he said, reiterating that individuals must avoid dealing in cash, especially with large transactions.

Section 269SS restricts the recipient from taking or accepting any loan or deposit or any specified sum from any other person in cash. However, restriction isn’t imposed if the recipient and depositor, both are having agriculture income and neither of them has any income chargeable to tax, according to information available on the income tax department’s website.

The provision is applicable only if the amount of such loan or deposit or specified sum from a depositor is ₹20,000 or more.

That being said, mere entering into a cash transaction does not imply non compliance, as long as the receipts are fully reported in ITR, and such income can be fully substantiated through adequate documentation, Anandan noted.

What documents to maintain after a property sale?

The taxpayer should maintain a complete set of documents supporting both the ownership and the sale of the inherited property. An individual must preserve the following documents:

• Registered sale deed
• Documents establishing inheritance such as a will, succession certificate, probate, among others.
• Bank or cash receipt evidence
• Builder correspondence aka the written communication exchanged between a property buyer and a real estate developer
• Capital gains computation sheet
• Original purchase deed
• Records establishing the previous owner’s date of acquisition
• Stamp duty valuation records

Makhijani said that the taxpayer must disclose the full value of the sale consideration, the cost of acquisition as determined under the provisions applicable to inherited property, the resulting capital gains, and details of any exemption claimed, if applicable, while filing their tax return.