Inheritance has been a way of preserving wealth and ensuring that assets are passed down through generations, making it an integral part of estate planning and family wealth management.

While many countries impose inheritance or estate taxes on property and assets passed down from a deceased individual to their heirs, India does not currently levy an inheritance tax.

However, it is crucial to understand the tax implications surrounding inheritances, including potential taxes on income generated from inherited assets, the legal process involved, and how Beneficiaries manage these inheritances.

This comprehensive guide provides an overview of inheritance tax laws in India, discusses the tax treatment of various inherited assets, and highlights essential aspects of inheritance in the Indian context.

What Is Inheritance?

In legal terms, inheritance refers to the process by which a deceased person’s assets are transferred to their legal heirs.

These assets, known as the deceased’s assets, can include personal property like cash, jewellery, investments, and real estate such as land or buildings. Inheritance extends to any immaterial possessions, such as intellectual property or business shares.

When a person dies, their estate is managed according to the terms specified in their Will. If the deceased has not made a Will, they are said to have died intestate, and their estate will be divided among legal heirs based on the succession laws in India.

The Inheritance Tax is a tax levied on these transfers of assets; however, in India, there is no such tax, making it crucial to understand which other taxes apply.

Inheritance Tax: An Overview Of Global Context & Indian Exception

Inheritance tax is a levy that some countries impose on the transfer of assets upon the death of the owner.

This tax can apply to sizable inheritances like high-value properties, businesses, or large amounts of money.

Countries like the United States and the United Kingdom have structured inheritance and estate taxes based on the estate’s total value, sometimes with exemptions up to a certain threshold.

In India, there is currently no inheritance tax or estate tax. This was not always the case, as India did impose inheritance tax up until 1985.

The government repealed the tax due to issues with enforcement and the economic burden it placed on heirs. Today, inheritance taxes remain absent in India, but certain types of taxes still apply to the assets inherited by beneficiaries.

Tax Implications On Inherited Assets In India

While the act of inheriting assets itself is not taxed in India, income generated from these inherited assets is subject to taxation under Indian law.

Here’s how different assets are treated:

1. Real Estate

• Inheriting real estate, such as land or a house, does not incur any immediate tax for the heir. However, if the heir decides to sell the property, they may be liable to pay capital gains tax assuming the cost of acquisition as that of the deceased.
• Capital Gains Tax: If the inherited property is sold, the capital gains tax will depend on the period of holding and the value appreciation of the property. Long-term capital gains (on properties held for over two years) attract lower tax rates with the benefit of indexation, while short-term gains are taxed at regular income tax rates.

2. Financial Assets

• Bank Deposits and Cash: Inherited bank deposits and cash are not directly taxable. However, any interest earned on the inherited bank deposits becomes taxable as income from other sources.
• Shares, Bonds, and Mutual Funds: While receiving inherited stocks or bonds is not taxable, selling them triggers capital gains tax based on whether they are held long-term or short-term assuming the cost of acquisition as that of the deceased..

3. Gold, Jewellery, and Other Valuables

• Gold, jewellery, and other valuables are common forms of inheritance. Similar to real estate, capital gains tax applies if these assets are sold. If held for over three years, they qualify for long-term capital gains with indexation benefits.

4. Business Ownership

• If the deceased individual left sizable inheritances in the form of a business or business shares, the successor must consider the valuation of the business. Selling the business incurs capital gains tax, while income generated from it will be taxed as business income.

Legal Process & Succession Laws Governing Inheritance In India

In India, the legal framework surrounding inheritance is governed by the Indian Succession Act for individuals who do not fall under specific religious personal laws.

Religious personal laws, such as Hindu Succession Act and Muslim Personal Law, also play a significant role in determining the inheritance process.

1. Hindu Succession Act: This law governs inheritance for Hindus, Jains, Sikhs, and Buddhists in India. It outlines the rights of heirs, such as sons and daughters, to inherit property from their parents.
2. Indian Succession Act, 1925: Applicable to Christians, Parsis, and individuals not covered by other religious personal laws, this Act governs the succession of both movable and immovable properties in cases of intestate succession.
3. Muslim Personal Law (Shariat): Under this law, inheritance is distributed among heirs based on specific shares laid out in Sharia law, which cannot be overridden by a will, except for a portion of the estate that can be given to a non-heir Beneficiary.

The Probate Process & Inheritance Distribution

The probate process involves the legal process through which a Will is validated by a competent court, enabling the heirs to inherit the deceased’s assets.

While a probate is not always necessary in India, it is required in certain cases, particularly if the Will is contested or if the deceased’s assets are located in metropolitan cities like Mumbai, Chennai, or Kolkata.

• Obtaining Probate: The probate process includes filing an application with the relevant court, paying stamp duty, and having the Will verified.
• Dividing Assets: After the probate is granted, assets are distributed to the Beneficiaries as per the Will’s terms or, in the absence of a Will, according to the applicable succession laws.

Unclaimed Inheritances & Legal Heirs

An unclaimed inheritance occurs when the rightful heir or heirs are not available, not known, or unable to claim their inheritance.

Unclaimed inheritances may result from factors such as the decedent dying intestate, no known heirs, or heirs unaware of the assets left behind.

In India, unclaimed assets like bank deposits, insurance policies, and mutual funds must be reported and can be claimed by legal heirs following specific processes.

Inheritance & Gift Taxes: Understanding Tax-Free Gifting

Although inheritance tax is not levied in India, there is a gift tax under the Income Tax Act, 1961, which applies to certain transfers.

Under Indian law, any gift received from relatives is tax-free, while gifts above a certain threshold from non-relatives are taxed as income.

Therefore, some individuals may choose to transfer wealth to family members in their lifetime through gifts to avoid potential legal complications post-death.

• Gifts from Parents: Gifts from parents to their children are tax-free in India, which can be a beneficial way to transfer wealth without additional tax implications.
• Thresholds for Non-Relatives: Any gift received from non-relatives exceeding Rs 50,000 in a year is considered income and taxed accordingly.

Protecting Inherited Wealth: Estate Planning Tips

Effective estate planning ensures a smooth transfer of assets and avoids conflicts among heirs.

Here are some strategies for protecting sizable inheritances and passing on wealth with minimal legal complications:

1. Creating a Will: Drafting a valid Will is essential to ensure the smooth transfer of assets to your heirs. A Will allows you to specify which assets go to whom, reducing the chances of family disputes.
2. Setting Up Trusts: Trusts are an efficient way to manage and protect inherited wealth, especially for individuals with minor children or those who want to provide for family members without direct inheritance.
3. Reviewing Beneficiary Designations: Ensure that all financial accounts, such as mutual funds and insurance policies, have up-to-date Beneficiary designations.
4. Consider Power of Attorney: Assigning Power of Attorney to a trusted individual allows them to manage assets if you become incapacitated, providing additional security for your estate.

The Bottom Line: How Yellow Can Help

India’s decision not to levy inheritance taxes simplifies the transfer of assets, allowing families to preserve wealth across generations.

However, taxes on income generated from inherited assets, as well as capital gains tax on property sales, are still applicable, underscoring the importance of estate planning and understanding tax implications.

By planning effectively and keeping inheritance laws in mind, individuals can protect their legacy, ensure that assets are distributed according to their wishes, and avoid unnecessary financial burdens on their heirs.

Whether it’s drafting a Will, setting up Trusts, or seeking professional advice, effective estate management can make all the difference in preserving wealth and passing it on smoothly to future generations.

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.

‍