One of the most compelling reasons for succession planning is to be able to pass on one’s hard-earned assets to near and dear ones. The two most commonly used vehicles to plan one’s succession are Wills and Trusts. Assets may also be passed on to the next generation if they are appointed as a Nominee (in case of life insurance, or EPF), or by right of survivorship (in the case of certain asset classes, such as jointly held bank accounts or immovable property).

Very little, however, is written about the tax implications that Beneficiaries or legal heirs may face upon inheritance. Here’s all you need to know.

What’s The Difference Between Estate Tax & Inheritance Tax?

One often uses “estate tax” and “inheritance tax” interchangeably; however, while the purpose of both these taxes is the same, the person who has to pay these taxes is different.

Estate tax is collected directly from a deceased person's estate before it is distributed to heirs/Beneficiaries. On the other hand, inheritance tax is collected from heirs who inherit assets, ie it is imposed after, or at the time of, distribution. Collectively, estate tax and inheritance tax are often called “death taxes”.

Death tax is prevalent in many countries, including the UK, Canada, USA, and Australia. In India, however, there is currently no death tax. Previously, the Estate Duty Act, 1953 was in force in India, where a tax was levied on the estate of the deceased person. At that time, the estate duty was levied on a progressive basis and was nearly as high as 85%! Thankfully, it was abolished in 1985. Currently, there are no estate or inheritance tax implications in India upon the demise of Indian residents. Nevertheless, it is still helpful to familiarise oneself with certain tax implications that need to be kept in mind while disposing of your inherited asset.

Are Taxes Levied On Inherited Assets in India?

Though there is no estate duty in India, tax is applicable once the person who inherits such a property transfers any asset (eg sale, gift, etc). However, this is subject to several conditions under prevailing tax and other regulations.

What Is A Gift Tax?

In India, people often contemplate making a gift of immovable or movable property to their loved ones during their lifetime. This is especially popular during special occasions, such as marriage. A gift is defined as a transfer made between the donor (the one making the gift) and the donee (the one receiving the gift) of any immovable or movable property.

These gifts may be in any form, including cash, jewellery, property, shares, or vehicles. However, one should be aware that in India, a gift tax is applicable on receiving gifts that are of a certain value. The rules for this are specified under the Income Tax Act, 1961 (‘Act’). The Act states that gifts whose value exceeds ₹50,000 in a year, from a donor, are subject to gift tax in the hands of the recipient. There are, however, certain exceptions to this rule, including:

• Gifts received from relatives (narrowly defined under the Act)
• Gifts received by the bride or groom during their wedding
• Gifts received as part of inheritance

In the case of inheritance, once the asset is transferred to the legal heir or Beneficiary, they become the legal owner of the asset. They are therefore liable to pay taxes on any income arising from it as per the applicable laws.

What About Stamp Duty?

Stamp duty and registration charges are levied on the gifting of property, especially immovable property. The charges payable differ from state to state. Hence, in order to calculate the applicable stamp duty, one needs to check the stamp duty laws of the relevant state where the immovable property is located.

Keep in mind also that gifts received from family members attract different stamp duty charges than gifts received from those who do not fall under the definition of family members under the applicable stamp laws. It is also worth noting that some states offer a rebate on stamp duty for certain blood relations. For non-family members, stamp duty may range from two to seven percent of the market value of the property.

Taxation On Income From An Asset Received As Inheritance

The taxes for income from inherited movable and immovable property are different.

Inheritance of immovable property

As seen above, when a person inherits immovable property, there is no gift tax levied. However, once the person receives it, he or she becomes the lawful owner and is responsible for declaring income arising from that asset as a part of their income. The person is also responsible for paying property tax and tax on rental income, if any. Should the person decide to sell the inherited asset, provisions pertaining to capital gains taxes apply, factoring in the acquisition cost and period of holding of the previous owner.

Inheritance of movable property

Similar to immovable property, there are no tax implications for the person receiving any movable property at the time of inheritance. For movable property, such as jewellery, mutual funds, and bank accounts, the Beneficiary or legal heir will have to ensure that the account details are updated with their own details, so that the funds/assets are smoothly transferred to them. Upon sale of such an asset however, provisions pertaining to capital gains taxes do apply, factoring in the acquisition cost and period of holding of the previous owner.

The Bottom Line

To sum up, death taxes do not exist in India. However, once an individual inherits the asset, he or she becomes the lawful owner and is therefore responsible for declaring the asset as a part of their income and paying the applicable taxes that follow.

However, if the recipient of the inheritance is not an Indian resident, then the applicable provisions in the country in which they reside will also have to be looked at before determining whether or not death taxes apply.