Tax Implications of Receiving Inheritance

Ankita Tiwari

17 May, 2023

After the passing away of a person, the property and assets get passed on to the deceased person’s legal heirs such as children, grandchildren, or wards. This act where the property gets passed on to the legal heirs is known as inheritance. The inherited property includes movable or immovable assets. The inheritance of a property is done under the Succession law applied as per the personal law. The inherited property can be in the form of immovable property or real estate property and movable property such as Mutual Funds, Fixed Deposits, gold, etc. All those who have inherited a property or are going to inherit a property have a concern regarding the tax implication of the inherited property.

Methods by which a property can be inherited

1. By the will of succession

This is a traditional way of inheritance. Will is a document where a deceased person (testator), during his lifetime declares who shall be the lawful owner of his/her assets after the death of the testator. The property passes on to the successor mentioned in the Will only after the death of the testator.

2. Inheritance by way of nomination

A person can during his lifetime nominate a person of his/her choice to be the lawful owner of the asset. The nominee shall be the lawful owner of the assets and the benefits generated from such assets.

3. Inheritance by joint ownership

Where an asset or property is under the joint ownership of two or more people, the survivor(s) of the asset/property gets to manage the asset after the death of one or more owner(s).

What is Inheritance Tax?

For many, the inherited property is a source of income such as rent, interest, etc. When the properties belonging to a deceased person are passed on to his/her legal heirs, any income generated from the passing on of such property is subject to tax known as inheritance tax. In simple words, an inheritance tax is a tax paid on the inherited or the ancestral property. Now the successor or the person who has inherited the property should have to declare his income from the inherited property and pay taxes accordingly. Currently, India does not levy inheritance tax. The Inheritance or Estate Tax has been abolished from 1985 onwards. As the inherited property is transferred without any consideration in return, hence it qualifies as a gift for income tax purposes. However, the Income Tax Act of 1961^[1] specifically excludes the transfer of assets by inheritance or will from the purview of gift tax. Thus, no law provides for the taxation of property received by way of inheritance.

Tax Implications of Inherited Assets

In India, the succession law is applied in the case of inheritance of assets. When a Hindu dies, the assets are transferred under the Hindu Succession Act. No tax is levied on inheriting assets under the Income Tax Act of 1961. However, if the successor decides to sell the property then tax will be levied. Like in the case of Mutual Funds, shares, gold, etc., the successor is not liable to pay any tax but if he/she decides to sell these movable assets then have to pay tax.

Tax Implication of Inheriting Immovable Property

1. While selling an inherited property, tax is paid on taxes on long-term capital gains arising from the property. A long-term capital gain arises when the property is sold after three years from the date of inheritance. The successor/seller of the property is subject to tax liability after he/she receives money from the sale of assets.
2. Section 54 of the Income Tax Act of 1961 says that the successor of the property can be exempted from tax if he/she invests the sale proceeds arising from the sale of the property in another property of the same value. If the property is sold at a lesser value then the remaining balance is deposited in the Capital Gains Account scheme before filing the income tax.
3. A non-resident Indian can inherit property in India as per the Foreign Exchange Management Act of 1999 (FEMA) and no inheritance tax will be levied.
4. The successor of a property worth more than INR 30 lakh has to pay Wealth Tax however, if the inherited property is the only property of the successor, then he/she shall be exempt from wealth tax.

Tax Implication of Inheriting Movable Property

1. Unless the legal heir, nominee, or joint owner(s) of the property decides to sell the movable property, no tax shall be levied on movable assets. However, certain formalities need to be fulfilled by the person inheriting a movable property.
2. Where a bank account is inherited, the successor should change the account name. The Nominee, survivor, or legal heir shall be credited with a pipeline flow to make withdrawals from the account.
3. Where a locker is inherited, the belongings in the locker will be transferred to the successor, legal heir, or survivor. The bank releases the belongings to the legal heir, survivor, or successor against an indemnity, and no taxes are levied upon it.
4. If the movable asset is a fixed deposit then the legal heir, successor, or survivor has to wait for the fixed deposit to mature or close the fixed deposit account prematurely. In such cases, the bank will add “deceased” against the deceased account holder’s name.
5. Where shares are inherited, the dematerialized forms are transferred to the joint account holder, nominee, or legal heir automatically depending upon the method of inheritance. Such a person is then liable to pay income tax on the returns.  
6. The life insurance policy matures after the death of the insured, to get the claim, the nominee has to apply with certain documents.
7. Upon the death of the deceased, the inherited vehicle should be transferred in the name of the new owner by applying with the state RTO.

Tax Implication of Income Arising from Inherited Property

Even though no tax is levied at the time of receiving an inherited property in India but income tax is levied on the receipt of any income which arises from the inherited property. Such as any rent or interest arising after inheriting the property will be liable to tax. The person receiving income from inherited property is required to file Income Tax Return at the end of every year disclosing the income earned during the year in the Income Tax Return.

Conclusion

As seen above, the tax implication of inheriting property in India is that no inheritance tax is levied in India. Any amount received by way of a Will or inheritance or upon the death of the taxpayer is exempt from the levy of Income Tax as per the exemption provided in section 56 (2) of the Income Tax Act of 1961. No inheritance tax is applicable on the inheritance of a property however, any subsequent income arising from the property shall be liable to income tax.

Read our Article: The Implication of Income tax on the Gift