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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.
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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).
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.
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.
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.
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
Ankita is an Advocate and has joined Enterslice as a Legal Researcher. Her work focuses on General Civil and Commercial laws, Corporate Taxation Laws, Labour and Employment Laws and Dispute Resolution. She is a law graduate from School of Law, University of Petroleum and Energy Studies. Prior to joining Enterslice, Ankita has the experience of practicing law in Delhi and Odisha.
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