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What is Tax on Inheritance?

Currently, India doesn't levy inheritance tax on assets received from deceased individuals. However, taxes may apply when selling inherited property. For immovable assets, long-term capital gains tax is applicable if sold after three years. Movable assets like bank accounts, lockers, and shares have specific transfer procedures. ...Read More

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What is Tax on Inheritance?

Tax on Inheritance in India: All You Need to Know

Tax on inheritance- All you need to know
July 10, 2024

Table of Content

 

  • Inherited assets may include movable or immovable assets

  • In India, the succession law is applied in accordance with the personal law

You might be wondering about your tax liability on your inherited assets. Your inherited assets may include immovable property or real-estate property and movable assets like gold, mutual funds, FDs, etc. There are different conditions of tax liability on any inherited asset in India. Here is all the information you need to know about inheritance tax.

What is Inheritance tax?

Inheritance tax is a type of tax which is levied on the income earned by an individual from his/her ancestral property

In the event of death of an individual, properties belonging to the deceased would pass on to his legal heirs – children, grandchildren or wards.

Many a time, the inherited property is a source of income – rent, interest etc. – to the new owner. When the heir becomes the owner, the income goes to him/her. So, the new owner must declare this income and pay taxes accordingly.

Inheritance tax is levied on any assets or property that are passed on by a deceased to his legal heirs, be it children or grandchildren.

How Inheritance Taxes Are Calculated?

Inheritance tax rates vary from one country to another. Typically, it follows a progressive rate. The rate of inheritance tax depends on the inheritance value and the person receiving it. Considering all these, inheritance taxes are calculated on a sliding basis. 

The exemption you receive from taxes and the rate you are charged varies according to the relationship with the deceased. If you are to pay an inheritance tax, you will be paying only for a certain portion of your inheritance above the exemption amount. 

The closer your relationship with the deceased, the higher will be your exemption and the lower the tax rate you will have to pay. In USA, surviving spouses are exempted from payment of inheritance taxes. 

When it comes to inheritance tax in India, you only need to calculate capital gains tax as there is no tax for inheriting an asset. This applies when you sell inherited assets. The capital gains tax depends on the holding period and the type of asset. 

Methods of inheritance tax

  • Will of succession

This is an old and traditional way of inheritance. Will of succession is a document in which the deceased person has pre-declared the lawful owner of his/her assets.

  • Inheritance by nomination

A person can declare a person of his/her choice as the nominee. The nominee then becomes the lawful owner of an asset and the benefit it generates.

  • Inheritance by joint ownership

If any asset lies under the joint ownership of two or more people, the survivor(s) get to manage the asset post death of the other owner(s).

Inheritance by Joint Ownership

If there is an existence of any asset or property under joint ownership of people, involving two or more individuals, the surviving person possesses complete control of the deceased person's assets. 

Joint ownership of the inherited property takes place in the following ways:

  • Tenants in Common

This is when two or more people are involved in purchasing a property but do not mention shares of each other. If one of them dies, his or her assets are then passed on to the legal heir.

  • Joint Tenancy

This is when two or more persons are owners of the property and each of them has equal shares with the same rate of interest and under the same deed. When one of the joint tenants dies, the other surviving tenant avails the share.

  • Tenancy by Entirety

This kind of ownership takes place between spouses. None of them can sell off the property without the consent of the other spouse. Thus, it is only possible to end ownership only through death, divorce or mutual agreement between spouses.

Taxation on inherited assets

In the Indian scenario, the succession law is applied in accordance with the personal law. That is, in case of a death of a Hindu, the assets will be divided according to the Hindu succession act and so on.

As per the Income Tax Act of 1961, no tax is levied on the inherited assets, whether movable or immovable, as such. However, the tax will be levied if the new owner decides to sell the property. In case of movable assets like mutual funds, gold, shares, etc., the new owner is not liable to pay any tax. But he/she shall have to pay the tax when they decide to sell these movable assets. Let us now see what the tax liabilities on different inheritance conditions are.

The following conditions will help you get a clearer picture.

Tax on Inheritance of immovable property

  • While selling the inherited property, keep in mind to pay the taxes on the long-term capital gains from the sold property. If the asset is held for more than three years from the date of acquisition, then the new owner is subject to tax liability after he/she receives the money from the sale of the asset.

  • To save on the capital gains tax, Section 54 of Income Tax act of 1961 says that the new owner can be exempted from this tax if he/she invest the sale proceed in another property of equal or more value. If the purchased property is of lesser value, then the remaining balance must be deposited in Capital Gains Account scheme before filing the income tax.

  • An NRI can inherit property in India under the Foreign Exchange Management Act (FEMA), and no tax will be levied on inheritance.

  • If the value of the inherited property is greater than INR 30 Lakh, then the new owner will be liable to pay Wealth Tax. However, if it is the only property a person has, he/she will be exempted from the wealth tax.

Tax on inheritance of movable assets

No tax is levied on the movable assets, unless the legal heir, nominee or the joint owner decides to sell them. However, certain formalities must be fulfilled by the inheritance owner in case of receiving movable assets.

  • In case of inheriting a bank account, you must change the account name to Account Holder Deceased. If you are the nominee, survivor or legal heir, then you will be credited with the pipeline flow to make withdrawals from the account.

  • In case you inherit a locker, the belongings of the locker will be transferred under your ownership. The bank will release the belongings to you against an indemnity. No tax is levied here.

  • If the asset is a fixed deposit, the new owner can wait for the FD to get mature or close the FD account prematurely. The bank, in this case, will add deceased against the account holder’s name.

  • In case of inherited shares, the dematerialized forms are transferred automatically to the joint account holder, nominee or the legal heir depending upon the method of inheritance. You are then only liable to pay the income tax as per your returns.

  • The life insurance policy matures after the death of the insured. In this case, the nominee is required to apply with certain documents to get the claim.

  • In case of inherited vehicle, the new owner must transfer the vehicle under his/her name by filing an application with the state RTO.

Knowing the above conditions will help you realize the right ownership of an asset and make the best possible decision to grow it, while you can reap the tax benefits with the right guidance.

Income Tax Implications on Inheritance

If there is a sudden death of an individual, the properties belonging to the deceased are then transferred to their legal heirs. These kind of transfer however is undoubtedly a transfer of assets, and can be subject to taxes as a gift under income tax returns. However, any inherited property does not fall under gift taxes in the Income Tax Act of 1961. Hence, this law doesn't apply to taxation of property received through means of inheritance.

Tax on Income from Inheritance

Any inherited property is the owner’s main source of income. When an heir turns out to be the owner, the income consequently gets transferred to him. Thus, any new owner must make a declaration of this income. No taxes are applicable in India for simply inheriting assets. 

Tax on Subsequent Sale

Once a property is inherited, you are made the owner. Thus, you can make decisions to sell the property as required. The capital gain or loss thus accrues to you as the legal heir. Furthermore, the waiting period of the property helps in determining if capital gains are short-term capital gains tax or long-term capital gains taxes.

Conclusion

By now, you must have a clear understanding of inheritance tax. Many countries around the world have such a tax to lower the tax payment burden on the weaker sections of Indian society. At present, India has no tax on inheritance. Hence, if you are inheriting any property or assets, you will not have to pay any taxes. However, if you are planning to sell off the inherited property, you must make a declaration of inheritance on your tax returns. 

FAQs on Tax on Inheritance

  1. How is inheritance taxed in India?

    2. There is no inheritance tax in India. Assets passed on to legal heirs are gifts and received without any consideration. 

  2. Can NRIs inherit property in India?

    3. Yes, NRIs can inherit property in India. However, they are no taxes on inheritance. 

  3. Is inherited life insurance taxable?

    4. Any proceeds from a life insurance policy because of the sudden death of a policyholder are tax exempted. Thus, under this circumstance, the nominee can claim the required sum assured amount. 

  4. Is there a capital gains tax on inherited shares?

    5. Capital gains tax is applicable on inherited assets if the person who inherited the assets decides to sell them. 

  5. Is inheritance tax-free in India?

    6. Till now, there is no inheritance tax in India. Thus, if you inherit any property or assets, you do not have to pay any taxes and can avoid them. 

  6. Can I avoid inheritance tax in India? 

    7. Inheriting any property from a deceased individual will make you pay no taxes. Since inheritance taxes are exempted from India as of now, you can avoid it. However, you have to pay taxes on income generated from inherited assets.

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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Note - Tax benefits & exemptions are subject to conditions of the Income Tax Act, 1961 and its provisions. Tax Laws are subject to change from time to time. Customer is requested to seek tax advice from his Chartered Accountant or personal tax advisor with respect to his personal tax liabilities under the Income-tax law.

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