Tax Implications for a Deceased Person

Even deceased people with income over the basic exemption must file income taxes. As the individual has died, the deceased person's legal representative is responsible for their taxation. Learn more about taxation, timing, the legal representative, and the transfer of property.

While this document covers 'Tax Implications for a Deceased Person', refer Filing Income Tax Return for the Deceased Person.

This document covers

Who is Legal Representative?
Calculation of the Deceased Person's Income
Filing of Income Tax Return of Deceased person
Surrender of PAN of deceased person
Taxability of Assets transferred to Legal Representative
Sale of property or other assets by Legal Representative

1. Who is Legal Representative?

The term "legal representative" refers to a person who represents the estate (property) of a deceased person and encompasses anyone who interferes with the estate.
It is not necessary that the legal representative should be beneficial owner of the estate.
It is sufficient that the estate (property) passes on to him.

2. Calculation of the Deceased Person's Income

The income of the deceased person needs to be computed from the start of financial year to the date of death.
The income from date of death of deceased person to the end of financial year is taxable in the hands of legal representative.

NOTE : Some revenues, such as dividends and interest, may be payable after death. However, these revenues cannot be divided between the date of death and subsequent dates because they do not accrue daily.

3. Filing of Income Tax Return of Deceased person

It is the responsibility of the legal representative to file the income tax return of the deceased person.
The due date for filing Income Tax Return is July 31st every year if it is Non Audited and October 31st every year for Audited case. Check the latest dates from Income Tax Calendar

Refer filing income tax for a deceased person including to know the process of registering as legal representative of deceased.

4. Surrender of PAN of deceased person

PAN of the deceased person must be surrendered only after doing the following activities

Close bank accounts
Transfer the Assets
Pay the pending taxes
File the income tax returns

The Legal representative should write a letter to Assessing officer mentioning the details of deceased person like name, PAN, Date of birth, reasons of surrender and copy of death certificate.

5. Taxability of Assets transferred to Legal Representative

There is NO TAX on the value of assets transferred to legal heirs after the demise of the individual.
Rental Income received on the properties transferred to legal heirs is taxable in their hands under the head House Property
Interest Income received on the Bank balance or Fixed deposits transferred to legal heirs is taxable in their hands under the “Income from Other Sources”.

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6. Tax implications on Sale of property or other assets by Legal Representative (Legal heir)

Transfer of Capital asset from deceased person to Legal heir will be treated as inheritance and there is no tax on the transfer
If the Legal heir sells the property which he inherited, capital gain will be arising in the year of sale and the legal heir is required to pay the taxes on the capital gain and file the income tax return in the year of selling the property.
While calculating capital gain of the property, the original cost to the deceased will be treated as cost to the legal heir.
The period of holding of capital asset to the legal heir is calculated from the date of purchase of asset by the original owner. The legal heir can compute the indexation from the date of purchase or 01 st April 2001 whichever is beneficial.

OBSERVATION - legal heir reinvesting on behalf of the deceased person

There might be a situation where the person has sold the property but expired before filing of income tax return without reinvesting or payment of taxes. There is a possibility that the question will arise that the legal heirs can reinvest on behalf of the deceased person to save taxes.

For above question,

The Income tax law is not clear on this but as per interpretation of law and various judgements, the legal heir is responsible for the taxation of deceased person and he is liable for any unpaid taxes to Government.
In short, the legal heir is taxed in the same manner as deceased person is taxed if he is alive.
In the same manner that the legal heir is responsible for paying taxes, he can also reinvest in house property on behalf of deceased person to save taxes on capital gains

EXAMPLE - on above observation

Mr Dasaradh aged 75 years has passed away in Oct 2021 and he has a son named Mr. Ram. Mr Dasaradh (father) was having a residential house property and a plot on his name, and he earned a rental income of Rs 6 lakhs upto Oct 2021.

Now the assets of Mr Dasaradh will be inherited by Mr Ram (son). Mr Ram is responsible for filing the taxes of Mr Dasaradh for FY 2021-22. Mr Ram needs to be added as a legal representative in Govt Income Tax portal and file his income tax returns as legal representative.

Mr Ram is getting rental income from the property inherited from Oct 2021 and this rental income needs to be shown by Mr Ram in his income tax return and pay the taxes.

Case Law - 1

Mir Gulam Ali Khan v. CIT [165 ITR 228] : The AP high court has observed that the object of granting exemption under section 54 of the Act is to give a tax exemption if a person who sells a residential house for purchasing another convenient house and so exemption must be given far as capital gains are concerned.

Case Law - 2

Madras High Court in C.V. Ramanathan v. CIT [125 ITR 191] : After the death of the taxpayer, legal heir enters into the shoes of the deceased taxpayer for all taxation purpose. Legal representative cannot be differentiated from the deceased taxpayer for this purpose. If the deceased taxpayer were liable to pay capital gains tax, the benefit of section 54 which forms part of the scheme of taxation of capital gains then legal heir cannot be denied because the latter condition of section 54 was fulfilled by his legal representative.

Like to learn more on inheritance and taxes?Taxation on Inheritance - Explained