In the context of estate planning, understanding the tax implications of transferring wealth is essential.

Although inheritance tax in India was abolished in 1985, there are still several tax liabilities associated with inherited assets under the Income Tax Act.

This comprehensive guide explores the history of inheritance tax, current tax laws, and how inheritance impacts legal heirs in India.

What Is Inheritance Tax?

Inheritance tax, also referred to as estate duty or death tax, is a tax imposed on the transfer of assets from a deceased person to their legal heirs.

While many countries continue to levy such a tax, India abolished inheritance tax in 1985 due to issues with implementation and administration.

The History Of Inheritance Tax In India

1. Introduction of Estate Duty:
   • Estate duty was introduced in 1953 under the Estate Duty Act to tax wealth transfers upon death.
   • This tax applied to both movable and immovable property.
2. Abolition in 1985:
   • The tax was repealed in 1985 due to its ineffectiveness in generating significant tax revenue and its impact on wealth retention.
3. Current Scenario:
   • India does not impose direct inheritance taxes, but there are tax implications for inherited assets under other provisions of the Income Tax Act.

Tax Implications On Inherited Assets In India

Although there is no inheritance tax, legal heirs are liable for taxes under specific circumstances:

1. Income Tax on Inherited Assets

• Inherited property is not taxed at the time of inheritance. However, income generated from such property is taxable.
• Example:
  • Rental Income: If an inherited property generates rental income, it is taxable under the heir’s income tax bracket.

2. Capital Gains Tax

• If an inherited property is sold, the sale attracts capital gains tax:
  • Short-Term Capital Gains (STCG): If the property is sold within two years of acquisition by the deceased. For financial assets the period of holding is one years instead of two years.
  • Long-Term Capital Gains (LTCG): If the property is sold after two years of acquisition by the deceased. For financial assets the period of holding is one years instead of two years.
• Cost of Acquisition: The cost is calculated based on the original purchase price paid by the deceased.

3. Gift Tax

• Gifts received from relatives (including inherited assets) are exempt from gift tax.
• Gifts received from non-relatives are taxable if their value exceeds ₹50,000.

4. Life Insurance Policy Proceeds

• Payouts from a life insurance policy are exempt from tax under Section 10(10D) of the Income Tax Act, provided the policy complies with specific conditions.

5. Mutual Funds and Bank Accounts

• Income earned from mutual funds or bank accounts inherited is taxable under the heir’s income bracket.

Tax Implications For Non-Resident Indians (NRIs)

NRIs inheriting property in India face additional legal and tax obligations:

1. Foreign Exchange Management Act (FEMA):
   • NRIs must adhere to FEMA regulations when inheriting immovable property.
   • They can inherit property from Indian residents or other NRIs.
2. Capital Gains Tax:
   • NRIs selling inherited property in India must pay capital gains tax and can repatriate the sale proceeds up to specific limits.
3. Double Taxation:
   • NRIs may face double taxation if the country they reside in also taxes inherited income or capital gains. A Double Taxation Avoidance Agreement (DTAA) can provide relief.

Key Tax Considerations For Inherited Assets

1. Valuation of Assets

• Accurate valuation of inherited assets, including movable and immovable property, ensures compliance with tax laws.
• Assets such as business property and shares must be valued as per their market value.

2. Tax Deductions

• Legal heirs can claim deductions, such as those under Section 54, for reinvestment in property to reduce capital gains tax.

3. Maintaining Tax Records

• Retaining documents like the original purchase deed, property tax receipts, and financial statements is crucial for calculating tax liability.

4. Tax Liability of Deceased

• Legal heirs are responsible for settling the pending income tax returns of the deceased.

Comparative Perspective: Inheritance Tax In Other Countries

India does not levy an inheritance tax, but many countries do. For example:

1. United States:
   • Estate tax applies to estates valued above $13.99 million (as of 2025).
2. United Kingdom:
   • Inheritance tax is levied at 40% for estates exceeding £1,000,000.
3. Japan:
   • Among the highest inheritance tax rates globally, up to 55%.

The absence of inheritance taxes in India provides a significant advantage for wealth transfer compared to these nations.

Common Strategies To Manage Tax Implications On Inherited Assets

1. Create a Will

• Clearly outlining asset distribution reduces disputes and simplifies tax filing for heirs.

2. Establish a Trust

• Creating a Trust helps manage inheritance, reduce taxes, and provide for long-term Beneficiaries like minor children.

3. Utilise the Capital Gains Account Scheme

• Heirs can deposit sale proceeds in a capital gains account scheme to defer or save on capital gains tax.

4. Life Insurance Policies

• Investing in life insurance policies ensures tax-free payouts to Beneficiaries.

5. Gifting During Lifetime

• Gifting assets during one’s lifetime can help avoid capital gains tax and disputes over inheritance.

Advantages Of No Inheritance Tax In India

1. Simplifies Wealth Transfer:
   • Heirs can inherit assets without incurring additional taxes.
2. Encourages Wealth Retention:
   • Eliminates the burden of estate tax, enabling families to retain inherited wealth.
3. Reduces Administrative Costs:
   • Avoids complex procedures associated with inheritance taxes.

Challenges Despite The Absence Of Inheritance Tax

1. Income Inequality:
   • The absence of wealth distribution measures may contribute to income inequality.
2. Tax Evasion:
   • Some assets may remain unreported, leading to potential tax revenue lost.
3. Estate Planning Complexity:
   • While no inheritance tax exists, understanding other tax obligations remains crucial.

FAQs On Inheritance Tax In India

1. Is there an inheritance tax in India?

No, inheritance tax in India was abolished in 1985. However, taxes like capital gains tax and income tax may apply to inherited assets.

2. Are gifts considered inheritance?

Gifts received from relatives are exempt from tax, while non-relative gifts exceeding ₹50,000 are taxable.

3. Do I have to pay tax on inherited property?

While inheriting property is tax-free, selling it attracts capital gains tax.

4. How are NRIs taxed on inherited property?

NRIs pay capital gains tax on the sale of inherited property and must comply with FEMA regulations.

5. Are life insurance payouts taxable?

Generally, payouts from life insurance policies are tax-free under specific conditions.

The Bottom Line: How Yellow Can Help

Although India does not impose inheritance taxes, understanding the tax implications of inherited assets is crucial for effective estate planning.

From capital gains tax to the management of inherited property, legal heirs must be aware of their responsibilities under the Income Tax Act.

Leveraging strategies like creating Wills, establishing Trusts, and utilising tax-saving provisions can help streamline the process.

Effective planning ensures that your wealth is transferred efficiently, providing financial security for future generations without unnecessary tax burdens. For comprehensive guidance, consult a tax advisor or estate planning professional.

At Yellow, we can help you with all aspects of estate planning, including Wills, Trusts, Powers of Attorney, Gift Deeds, Legal Heir and Succession Certificates, and Living Wills. We also offer post-demise and asset transfer services. Our team of legal experts has more than 50 years of combined experience.