Taxation on Inheritance - Explained

This document covers

1. Types of Inheritance Laws
2. Methods of Inheritance
3. Types of Inherited Assets
4. Taxation on Inherited Assets

1. Types of Inheritance Laws

1a. Intestate Succession

• Intestate Succession will be applicable when someone dies without a will
• These laws will depend upon legal, cultural and religious practices of a particular religion.
• Usually, the property will be split evenly among legal heirs, such as a spouse and children. If the spouse of the person who died is no longer alive, the assets would be split between the children of the spouse.
• To add on to what was stated above, if one of the deceased person's children died, that child's spouse and his/her children would each get an equal share of the assets that he/she is supposed to get.
• Legal Heirs are responsible for tax compliances in case of Intestate succession.
• The Following acts will cover the Intestate succession
  • Hindu, Jain, Sikhs and Buddhists — Hindu Succession Act
  • Christian, Parsi, Jews — Indian Succession Act
  • Muslims — Muslim Law (Sharia Law)

1b. Testamentary Succession

• Testamentary Succession will apply when the deceased person has made a will.
• The assets of the deceased person will be distributed according to the terms of the will.
• Legal Representatives are responsible for tax compliance in case of Testamentary succession.
• The following acts will cover the Testamentary succession
  • All Except Muslims — Indian Succession Act
  • Muslims — Muslim Law (Sharia Law)

2. Methods of Inheritance

The following are the methods of inheritance.

1. Will of Succession: This is the traditional way of inheritance. The will is a formal document that spells out how the property will be divided after the person dies. It will only be legal if at least two people sign it and witness it. This is part of "testamentary succession".
2. Inheritance by Nomination: This is a process of transferring certain assets to the nominees. Nomination will usually be possible for Banks, Fixed Deposits, Shares, Insurance, and Provident Funds. In this case, the person owns the assets offered. This is part of "testamentary succession".
3. Inheritance by Joint ownership: If the assets are owned by more than one person, they will be automatically given to the owners who are still alive. It is called "intestate succession" to pass on an inheritance by joint ownership.

3. Types of Inherited Assets

Inherited Assets can be movable or Immovable. The following assets can be inherited.

1. Ancestral Property of the deceased
2. Self-Acquired property of the deceased
3. Gifted property of the deceased
4. Jewellery or Gold
5. Shares, Securities, Mutual Funds or Bonds etc
6. Cash / Bank Deposits
7. Fixed Deposits or any related assets
8. Insurance policies, archaeological collection, paintings etc

4. Taxation on Inherited Assets

Currently India doesn't have any taxation at the time of inheritance. There is no tax under Income tax act or any other act. The tax will be levied only when the new owner wants to sell the asset.

• 4A. Immovable Assets

  Immovable Assets includes Residential House, Plot, Agriculture lands etc., When these properties are inherited, the legal heirs or legal representatives are required to pay taxes when they sell the assets or if any income generated from the assets.

  
  

  Income Generated from the Inherited Assets

  Any Rental income or any other income generated from the immovable properties will be taxable in the hands of legal heirs or representatives from the date of death of deceased person.

  
  

  Sale of Inherited Immovable Assets

  • The period of holding of the assets will be determined from the date of acquisition by the original owner.

    IMPORTANT NOTE:
    
    Most people think that the asset will be classified as short term or long term from the date of inheritance to them. But when the assets are transferred under inheritance, the date of acquisition by original owner needs to be considered to compute short term or long term

  • When the legal heirs or legal representatives sells the assets, the cost of acquisition by the original owner needs to be considered for purchase price.
  • If the deceased person got the property as a gift, the original price for the original owner (giver of gift) needs to be considered for purchase price.
  • If the deceased person acquires the property before 01st April 2001, the original cost or fair market value as on 01st April 2001 which ever is beneficial needs to be considered.
  
  

• 4B. Movable Assets

  Movable Assets includes Bank, Fixed deposits, Shares and securities, Mutual funds, Bonds, Insurance Policies, Gold, provident Fund, Furniture, Car etc.

  • Bank: When bank balance is inherited, legal heirs or representatives are required to pay the taxes on the interest earned under the head income from other sources under their tax slab.
  • Fixed Deposits: The legal heirs or representatives can either continue the FD or prematurely close the FD. They are required to pay the taxes on the interest earned under the head income from other sources under their tax slab.
  • Shares and Securities, Mutual Funds or Bonds: When Shares and securities, Mutual Funds or bonds are inherited by legal heirs or representatives, they are required to pay the taxes when they sell these assets.

    They need to classify them into short term or long term from the initial date of acquisition by the deceased person to date of selling by legal heirs or representatives. Legal heirs or representatives are not required to pay taxes only if they are holding.

  • Gold: Legal Heirs or representatives are required to pay taxes on the capital gains when they sell the gold. No taxes are required to be paid if they are holding the gold.
  • Furniture or Car: These will be considered as Personal assets. Hence Legal Heirs or representatives are not required to pay taxes when they sell the furniture or car or other vehicles.
  • Provident Fund: If the Nominee or legal heirs receive the provident, it might be exempt in the hands of legal heirs if the certain conditions are met by deceased person. Otherwise legal heirs or nominees are required to pay the taxes on Provident fund received.