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Tax on Inheritance in India

Updated on :  

08 min read.

It is a given that one’s property and assets (including ancestral ones) get passed on to their legal heirs – children, grandchildren or wards – after he/she passes away. In many countries, the heir must pay Inheritance Tax for inheriting any such property or assets from your parents or grandparents or any other relative or friend.

In India, however, the concept of levying tax on inheritance does not exist now. In fact, the Inheritance or Estate Tax was abolished with effect from 1985.

What is Inheritance Tax?

It is a given that one’s property and assets (including ancestral ones) get passed on to their legal heirs – children, grandchildren or wards – after he/she passes away. In many countries, the heir must pay Inheritance Tax for inheriting any such property or assets from your parents or grandparents or any other relative or friend.

In India, however, the concept of levying tax on inheritance does not exist now. In fact, the Inheritance or Estate Tax was abolished with effect from 1985.

Income tax implications on inheritance

In the event of death of an individual, properties belonging to the deceased would pass on to his legal heirs. This event, no doubt, is a transfer without any consideration in return. Hence, it could qualify as a gift for the purpose of income tax.

However, the Income Tax Act, 1961, specifically excludes the transfer of assets under will or inheritance from the purview of gift tax. Accordingly, the law does not provide for taxation of property received by way of inheritance.

Tax on income from inheritance

Many a time, the inherited property is a source of income – rent, interest etc. – to the owner. When the heir becomes the owner, the income goes to him. So, the new owner must declare this income and pay taxes accordingly.

For example, Mr.Ram is the owner of a commercial complex that is given for rent. He had incurred a cost of Rs. 50 lakhs for the construction of the complex. He earns a monthly income of Rs.60,000 from the complex as rent. Upon his death, the property is transferred from Ram to his legal heir (son) Shyam. Here, as the transfer is under a will, it cannot be considered taxable. However the rent of Rs. 60,000 will be taxable in the hands of Shyam, as the income accrues to him.

Tax on subsequent sale

Once you inherit a property, you become the owner and you can choose to sell it subsequently.  This way, the capital gain or loss too will accrue to you as the legal heir.

Further, the holding period (period for which the property was held by you and the deceased) will determine if capital gains will come under long-term capital gains tax or short-term capital gains tax.

For example, Mr. A inherited the property from his father upon his demise in the year 2017. Mr A’s father purchased the property for Rs.20,000 on February 2, 1997. It was sold for Rs.3,00,000 on October 2, 2022. Since the property has been held for a period of more than 24 months (the holding period includes the holding period of father too), the capital gain will be classified as long-term. Accordingly, the legal heir can avail the indexation benefits while determining the capital gains.

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