Tax on Inheritance in India

Tax on Inheritance in India

A person's legal heirs, such as children, grandchildren, or wards, are subject to inheritance tax on property and assets (including ancestors' assets), which is levied after they pass away. For inheriting any such property or assets from your parents, grandparents, or any other family or acquaintance, you must pay an inheritance tax in many countries.

Today, the majority of inheritance taxes are only found in wealthy nations, often at rates as high as 55%. But at the moment, there is no such thing as an inheritance tax in India. It applied to slabs ranging from 10% to 85% of the value of the inherited property and was in effect until 1985. Due to implementation and other factors, it was abolished in India with effect in 1985.

Income Tax and its Implications on Inheritance

In the event of a person’s death, the properties belonging to the deceased are generally passed on to their legal heirs. While such a transfer is undoubtedly a transfer of assets without any consideration due and could be taxed as a gift in the income tax returns. But the Income Tax Act of 1961 does not include inheritance as falling under the purview of a gift, so such a transfer of property is not taxable under income either.

Tax on Income Arising from Inheritance

Quite often though inherited property could be quite a lucrative source of income – interest, rent, and the like – to the person who received the property. When an heir becomes the owner of a property that brings in revenue, that is deemed new income that is coming into him. This means the heir to a property that bears revenues will still need to pay taxes on the income the property brings to him.

For instance, if Kamlesh constructs a building worth ₹.1 crore on a property worth ₹. 2 crores, that would be considered a valuable property. Let’s assume he earns an income of ₹3 lakhs a month from the various tenants of the building. On the occasion of his demise, let’s assume he bequeaths this property to his brother Ramesh. Whether that property is worth 2 or 3 crores, it is endowed to Ramesh who, however, will not be required to pay any income or inheritance tax on the property inherited from his brother. However, the rent of ₹3 lakhs a month that Ramesh would now proceed to receive from that property will be taxable as income to Ramesh.

Tax on the Potential Sale of Inherited Property

Any profit or gain that arises from the sale of a capital asset is a capital gain. Inherited property is not generally considered a capital gain since there is no sale, but only a transfer of ownership, under the category of a gift, which is a specifically exempted asset under the Income Tax Act of 1961. However, if the person who inherited the asset decides to sell it, capital gains tax will be applicable since any property once inherited can always potentially be sold.

Further, the holding period (the period of ownership) will dictate whether the capital gains would be deemed long-term capital gains or short-term capital gains, and the taxes on such a sale would need to be calculated accordingly.

For instance, David inherited a parcel of property from his father when he passed away in the year 2019. David’s father purchased the property for Rs. 1 lakh in 1999. Now, David sells the land soon after he inherits it for Rs. 20 lakhs at the start of 2020. When calculating the holding period for an inherited property, the date of the original purchase by the testator, that is, David’s father, is the date of acquisition that is binding upon David too. Now, since the property in question has been held for a period of more than 24 months, the capital gains are deemed to be long term. This means David would be able to avail himself of indexation benefits while determining the capital gains accrued to him.

Indexation is the process of multiplying the property’s cost by the Cost Inflation Index (CII) – fixed by the central government in its official gazette to measure inflation of the year in which it is sold – and then dividing it by the CII of the year in which it was purchased.

Filing income taxes is every citizen’s responsibility. The IT department verifies these declarations of income, and if any amount has been paid in excess, the department refunds the amount to the assessee’s bank account. Similarly, failure to declare and pay the appropriate taxes could draw penalties ranging from fines, imprisonment, or both. Everyone is required to file their tax returns correctly and on time to avoid penalty.

The form that contains the information pertaining to the income of and taxes paid by an assessee is called the income tax return. The Income Tax Department of India has various forms for it such as ITR 1, ITR 2, ITR 3, ITR 4S, ITR 5, ITR 6 and ITR 7.

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Due Dates for Filing IT Return

Vakilsearch recommends making use of Google Calendar to get early notification of due dates and on-time ITR filing.

Who Should File an Income Tax Return?

Under the provisions of the Income Tax Act of 1961, the entities required to file IT returns annually are:

• Every company, be it Private limited, LLP or partnership firm irrespective of the income or loss must file IT returns
• Individuals enjoying income from mutual funds, bonds, stocks, fixed deposits, income from interest, house property, and so on
• Individuals receiving income from property under charitable trusts, religious trusts or income from voluntary contributions
• Individuals or companies who want to claim tax refunds
• Salaried persons whose gross income before deductions under section 80C to 80U exceeding the exemption limit
• All individuals with foreign income Tax, foreign assets, NRI’s and tech professionals on onsite deputation.
• People who have opted for one job from another are also eligible.

FAQs on Tax on Inheritance in India

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