In many countries, an inheritance estate tax is imposed on the assets passed from a deceased person to their heirs. However, in India, there is currently no estate tax.
This means that legal heirs and other beneficiaries do not need to pay inheritance tax on inherited assets. But this does not mean that inherited property is free from all forms of taxation.
Income Tax Implications On Inherited Assets
While inheritance itself is not taxable in India, any income generated from inherited assets is subject to income tax under the Income Tax Act.
For instance, rental income from inherited property, dividends from inherited mutual funds, or interest from inherited bank accounts must be reported as taxable income.
Capital Gains Tax
When the inherited asset is sold, the legal heir must pay tax on any capital gains. The tax rate depends on the holding period of the asset.
For assets held for more than 36 months (24 months for immovable property), the capital gains are considered long-term and taxed at 20% after indexation.
If sold within the specified holding period, the gains are short-term and taxed at the individual's applicable tax rates.
The cost of acquisition and period of holding goes back to the previous owner (ie, the deceased person from whom the assets are inherited).
Gift Tax and Exemptions
If inherited property is gifted to someone else, gift tax provisions come into play. However, gifts received from specified relatives are exempt from tax.
For other cases, gifts valued over ₹50,000 in a financial year are taxable.
Read more: All you need to know about Gift Deeds in India
Reporting and Compliance
It's crucial for legal heirs to include inherited assets in their income tax return filing. They must comply with various formalities, such as obtaining a valuation report and maintaining records. Failure to report can result in penalties.
Special Considerations For NRIs
Non-Resident Indians (NRIs) who inherit property in India must adhere to the same tax rules as resident Indians. Additionally, NRIs might face taxation in their country of residence, depending on local laws and tax treaties.
Charitable Or Religious Purposes
Donations of inherited property for any charitable or religious purpose can provide tax benefits. Such donations are deductible from taxable income, subject to specified conditions under the Income Tax Act.
Tips For Managing Inherited Assets
- Consult a Tax Professional: Seek advice to understand the tax implications fully.
- Update Nominations: Ensure all financial accounts and properties have updated Beneficiary information.
- File Returns Promptly: Include income from inherited assets in your annual income tax returns.
- Plan for Taxes: Set aside funds to cover potential capital gains tax on the sale of inherited assets.
The Bottom Line
While there are no inheritance taxes in India, the income generated from inherited assets and the sale of these assets are subject to various taxes, including capital gains tax and income tax.
Proper planning and understanding of the tax implications can help in managing these inherited properties efficiently.
Legal heirs must ensure they pay taxes on any income generated from these assets and plan for potential capital gains tax on their sale to avoid any legal complications.
By being proactive, beneficiaries can significantly ease the financial burden and ensure compliance with tax laws, ultimately safeguarding their inheritance.
At Yellow, we can guide you on all aspects related to estate planning, from creating a Will or Trust to post-demise asset transfer services.
