BS Primer: All you need to know about tax on inheritance in India

Inheriting property (money, land, house etc) may sometimes require you to pay taxes on such inheritance. This is generally termed as inheritance tax or estate tax. This concept is quite prevalent in countries like the United Kingdom and the USA and existed earlier in India too. However, this tax, in India, was done away within the year 1985.

As a general rule, upon the death of an individual, properties that belong to the deceased would pass on to his legal heirs. The passing on of such assets would be considered to be a transfer without consideration and could partake the character of a gift under the tax laws of India. However, the income tax law specifically carves out an exemption from levy of gift tax on transfers done by way of will or inheritance. Accordingly, such inheritance would not attract income tax. 

However, there is every possibility that the property inherited could generate income of some nature. It could be either rent if the inherited asset if a house, it could be interesting if the inherited asset is in form of cash which the legal heir has deposited in the bank and such deposit yields interest. The income so generated must be offered to tax by the taxpayer under the appropriate head of income and taxes paid on the same at rates applicable to the income slab he falls under.

Subsequent sale of inherited property and income tax

Once the property is inherited, the legal heir is the owner of the property and hence would be liable to tax on all income that accrues on the property. Similarly, in case the property is sold subsequently, any profits arising on such sale, would accrue to him and therefore must be offered to income tax by him in his return of income.

Interestingly, the law also provides that the period of holding for determining if an asset is a long term or short term, the holding period of the previous owner i.e. the deceased, should also be considered. 

Here is a simple  example that will give you an easy understanding of the law discussed in the above paras:

Event 1:

Mr Chauhan has purchased a flat in the year 2002 for Rs 30 lakhs. Upon his death, this house was inherited by his son Rahul in the year 2007.  Such an inheritance would not have any tax implications.

Event 2:

After inheriting the house, Rahul let it out on a monthly rent of Rs 20,000. Such rental income must be offered by Rahul to tax under the head “Income from house property”

Event 3:

Rahul sold the flat in the year 2008 for Rs 45 lakhs. The gains made would be long-term as the property is a long-term asset because it has been held for a period of more than 2 years (holding period of Mr Chauhan also considered). Accordingly, Rahul can avail the benefit of indexation and is liable to pay tax on the net long-term gains at the rate of 20%. He may also choose to invest the proceeds as required by the income tax act to claim exemption on income from capital gains.

(Author is Founder & CEO of ClearTax)