India’s 1961 income tax act clearly states that any asset that is inherited, whether fixed or movable, is not subject to tax payment. In other words, this means that if e.,g., you inherit a villa, you are not liable to pay any inheritance tax. However, if you sell the estate, you will be entitled to tax payments. You also do not pay any tax on inheriting ancestral jewellery like gold or even investments made in stocks, bonds, mutual funds or other financial instruments. A gift tax varies from an estate tax and an inheritance tax. In the case of a gift tax, an individual does not transfer the entire property to the recipient while they are alive to avoid the tax payment. If the value of the gift is in excess of the amount specified by authorities, the person giving the gift has to make an admission about the same. In the estate tax case, the tax is imposed on the person’s assets after the person’s death. In other words, whoever acquires is liable to pay taxes. The relationship, in this case, is not of much consequence. In the case of inheritance tax, relationship plays a crucial role.
Did you know? Inheritance tax was earlier known as Estate Duty, and the inheritors were liable to pay tax on the same.
What Is Inheritance Tax in India?
Inherent tax is prevalent in several countries around the world. The estate or inheritance tax was applicable in India for a long time. It was only in 1985 when the central government of India abolished this tax which was also popularly referred to as Estate tax. Infact, four years after it was abolished, it was revived and made inheritors liable to pay a 10% tax on the valued inheritance. But this did not last for long, and it was abolished again. However, many are in favour of introducing it once more to bring about the proper distribution of wealth. The reasons for this are as follows:
- In the case of the rich and established families, assets inherited serve to obstruct social mobility. The descendants and inheritors of the wealthy continue to live lavish and stable lives. Inheritance tax will enable some redistribution of the wealth whereby the state can use it in the larger interests of the deprived.
- The constitution of India affirms the right to equality, which justifies the imposition of this tax.
- India benefits immensely from indirect taxes, which are borne by the middle and lower-middle-income segments of society. Direct taxes like inheritance can bring about a positive change in this aspect.
- If the government of India revives this particular tax, the less privileged sections of Indian society will be given some relief from tax liabilities.
- Inheritance tax, also referred to as estate duty, was earlier imposed on all assets that were inherited by children from their parents upon their demise.
Income Tax Implications on Inheritance
Before we understand the implications of income tax on inheritance, let us understand the various channels that constitute inheritance tax.
These are as follows:
- Legal documented Will - legal will that documents the transfer of the assets to the inheritors. This is an attested declaration which indicates that the inheritors are the rightful owners or inheritors.
- Joint ownership – If the assets transferred involve joint ownership, i.e., the inheritors include two or more individuals who are entitled to manage the assets after the demise of the parents.
- Nominated inheritors – This is a legal document wherein the concerned individual nominates inheritors of their choice.
- Tax on income from inheritance
Given below are the details of the various taxes applicable to inheritors on the income that they earn from inheriting assets.
Taxes on Income From Inheritance
According to the 1961 income tax act, the inheritors of any type of assets, be they immovable or fixed, are not entitled to pay taxes. These movable assets can include gold and gold jewellery, stocks like bonds, mutual funds and shares in the share market. There is an exception to this clause, i.e. if the inheritors plan to sell the movable assets, they are liable to pay taxes.
Sale of Fixed Assets and Payment of Taxes
- All the long-term capital gains which accrue to the inheritors are liable to taxation. In case the inheritors maintain the assets with themselves for a time frame exceeding three years (from the date of inheritance), they have to pay taxes on the revenue they earn when they sell the assets.
- As per section 54 of the 1961 income tax act, if the inheritors invest the income received from the sale of the assets in a property valued at par or even more, they will be exempted from the capital gains tax.
- If the said inheritors are non-resident Indians (NRIs), they do not pay any taxes upon inheriting the assets. This clause is established by the Foreign Exchange Management Act (FEMA)
- If the inheritors inherit immovable property which exceeds more than ₹30 lakhs, then they are entitled to pay wealth tax. If the property inherited is the only property the inheritor has, then the person is exempted from paying the said wealth tax.
Payment of Tax on Inheritance of Movable Assets
- The inherited movable assets do not attract any tax liability unless the inheritors sell them. This further involves the fulfilment of various requirements, which are listed below:
- Inheritance of bank accounts – Inheritors are required to make changes in the name of the account holder from whom they have inherited. If the inheritors are legal heirs to the deceased person, they will be allowed to make requisite withdrawals as per the acceptable legal guidelines.
- Bank lockers - In the case of a bank locker, the items stored in the locker are transferred to the ownership of the inheritors. The bank provides the items against some type of guarantee whereby the inheritors do not have to pay any taxes.
- Fixed deposits – In this case, the inheritors have the freedom of either allowing the fixed deposits to mature and then avail of them or closing them before they mature.
- Shares & Stocks inherited – The dematerialised form is inherited by the inheritors or joint nominees who then pay income tax in accordance with the revenue they earn on the same.
- Life insurance policies – These mature after a person after the passing away of the individual insured. The nominees in the policies have to complete certain formalities and furnish specific details to claim the said amount.
- Vehicles inherited – The inheritors have to make the necessary arrangements for transferring the said vehicle/s under their names. This requires them to apply to the specific regional transport office (RTO) office in that state.
Tax on Subsequent Sale
The number of tax inheritors have to pay when selling their ancestral property depends on the amount of capital gain they accrue from the sale. This involves two clauses:
- If they hold the ancestral immovable property for more than 2 years from the date of acquisition, the amount of gain from the sale is considered long-term gains (LTCG). Long-term gains that accrue in this manner carry a tax rate of 20.8% with indexation. Indexation here means the recalculation of the price at which the immovable property was purchased, including provision for inflation. This calculation is done in accordance with the regulations of the income tax authorities.
- If the inheritors hold the immovable property for a timeframe that is less than 24 months from the date of inheritance, the gains are considered to be short-term gains (STCG). In this case, the inheritors pay a slab rate in accordance with the rules laid down by the income tax authorities.
When selling inherited immovable property, the inheritors must familiarise themselves with all the laws that govern the process. They should possess details of the prices at which the property was purchased, indexation costs, and all related details to make a proper calculation of the capital gains tax. Inheritors can avoid payment of capital gains tax if they reinvest the amount in immovable properties of the same or more value but within specific timeframes. If the amount of capital gains tax is large, they can also invest in capital gains bonds. Section 54EC of the 1961 income tax act allows for an investment of ₹50 lakh every financial year.
This article helps you understand all the details about inheriting fixed and movable ancestral assets. The inheritance tax rule applies only under certain conditions involving the sale of such assets and the gains the inheritors acquire. The central government is planning to bring this tax law into effect to ease the burden of tax payments on the weaker sections of Indian society. Follow Khatabook for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting.