Taxation on inherited assets in India – know its implications and methods

Inheritance tax is imposed on property and assets (including ancestors’ assets) after a person passes away and is paid by their legal heirs, such as children, grandchildren, or wards. In many nations, you must pay an inheritance tax if you inherit any of these assets or property from your parents, grandparents, or any other family members or friends.

Today, most inheritance taxes are only found in developed countries, and they are frequently imposed at rates as high as 55%. However, there isn’t an inheritance tax in India right now. It was in effect until 1985 and applied to slabs ranging from 10% to 85% of the value of the inherited property. It was eliminated in India with effect in 1985 as a result of implementation and other factors.

Inheritance tax methods

• Will of succession: A traditional and age-old method of passing down wealth is through a will. In a will of succession, the deceased person names the rightful owner of his or her property in advance.
• Inheritance through nomination: A person may name a candidate of their choosing. The asset and the benefit it generates are then legally owned by the nominee.
• Joint ownership inheritance: If an asset is owned in joint ownership by two or more people, the surviving owner(s) will be in charge of it after the other owner(s) pass away.

Implications of Income Tax on Inheritance

Property belonging to a deceased person is typically transferred to their legal heirs upon death. Such a transfer is undoubtedly a transfer of assets without any payment in exchange and may be taxed as a gift on income tax returns. However, inheritance is not considered a gift under the Income Tax Act of 1961, so such a transfer of property is also not subjected to income tax.

Tax on Inheritance-Related Income

Even so, inherited property frequently provides the owner with a sizable source of income in the form of rent or interest. It is considered new income for an heir to receive when they take ownership of a property that generates income. This implies that the heir to a property that generates income will still have to pay taxes on it.

For instance, Kamal builds a building worth Rs 1 crore on a land worth Rs 2 crores. He earns Rs 3 lakhs per month from the building’s various tenants. Assume that he leaves this property to his brother Ramesh upon his death. Regardless of whether the property is worth two or three crores, Ramesh won’t be required to pay any income or inheritance tax on it. Ramesh will now receive Rs 3 lakh in rent from that property, but that amount will be taxable to him as income.

Tax on Potential Property Sales

Any revenue or gain derived from the sale of a capital asset is referred to as a capital gain. In general, inherited property is not regarded as a capital gain because there is no sale, only a transfer of ownership, which falls under the category of a gift, which is a specifically exempted asset under the Income Tax Act of 1961. However, if the person who inherited the asset decides to sell it, capital gains tax will apply because any property that has been inherited can always be sold. 

Additionally, the holding period (the duration of ownership) will determine whether the capital gains are considered long-term capital gains or short-term capital gains, and the taxes on a sale of such property would need to be calculated accordingly.

For instance, when David’s father passed away in the year 2019, David received a piece of property as his inheritance. In 1999, David’s father paid Rs. 1 lakh for the property. At the beginning of 2020, David sells the property shortly after inheriting it for Rs. 20 lakhs. When determining the holding period for an inherited property, David is also bound by the testator’s, David’s father, original acquisition date. As a result of holding the property in question for more than 24 months, the capital gains are now considered long term. This means that when calculating his capital gains, David would be able to take advantage of indexation benefits.

The process of indexation involves multiplying the cost of the property by the Cost Inflation Index (CII), which is a measure of inflation for the year it is sold and is set by the central government in its official gazette, and dividing the result by the CII for the year it was purchased.

Every citizen is required to file income taxes. If any amount has been paid in excess, the IT department will refund it to the assessee’s bank account after verifying these income declarations. The same could be said for failing to declare and pay the correct taxes, which could result in fines, jail time, or both. To avoid penalties, everyone must submit their tax returns on time and accurately.

The income tax return is the document that includes details about the assessee’s earnings and taxes paid. There are several forms available from the Income Tax Department of India, including the ITR 1, ITR 2, ITR 3, ITR 4S, ITR 5, ITR 6, and ITR 7.

Due Dates for IT Return Filing

It is advisable to use Google Calendar to receive early notification of due dates and ensure on-time ITR filing.

Who Must File an Income Tax Return?

The following entities are required to file annual IT returns under the provisions of the Income Tax Act of 1961:

• Regardless of income or loss, all businesses, whether private limited, LLPs, or partnership firms, are required to file IT returns.
• Individuals making money from mutual funds, bonds, stocks, fixed deposits, interest, and other sources
• People who receive income from assets held by charitable trusts, trusts for the benefit of religions, or from contributions made voluntarily
• Anyone seeking a tax refund, whether an individual or a business
• Salaried people whose gross income exceeds the exemption limit before deductions under sections 80C to 80U
• All people on onsite deputation who have assets or income in another country, NRIs, or both.
• People who chose one job over another are also qualified.

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