Tax on Inheritance in India

Inheritance tax is not levied in India currently. So, you must be asking why to bring it up? Well, the subject has come up again with some of the recent debates over its possible reintroduction. In this article, let’s gain a detailed understanding of the concept of inheritance tax. 

What is Inheritance Tax?

It is a general practice that one’s property and assets (including ancestral ones), are passed on to their legal heirs – children, grandchildren or wards – after they pass away. Inheritance tax, also referred as the estate duty or death tax, is levied on the estate of the deceased person. It is collected from the estate prior to estate distribution under a will or according to the intestate succession laws. It can also be collected from the beneficiaries who receive the estate of the deceased person. 

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, at present the tax law does not provide for taxation of property received by way of inheritance.

Tax on Income from Inheritance

Many times, the inherited property is a source of income – rent, interest, etc. – to the owner. When the heir becomes the owner, the income is received by the heir. 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 will not be taxable. However, the rent of Rs. 60,000 which will now be received by Shyam, will be taxable in the hands of Shyam.

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, 2023. 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 have to pay long-term capital gain tax at the rate of 20% (applicable surcharge and cess) and can avail the indexation benefits while determining the capital gains.

Reasons Government May Reintroduce the Inheritance tax

Inheritance tax is introduced by the countries around the globe to reduce the income inequality prevailing amongst various classes of people. In countries such as Japan rate of inheritance tax is as high as 55%. A recent report shows that 40% of India's total wealth belongs to the wealthiest 1% of its population, a figure higher than the global average of 7%. This growing economic gap is concerning. Reintroducing estate duty could help prevent wealth concentration and promote economic balance. However, considering that gift tax already applies to many transfers without payment, any new inheritance tax must not lead to double taxation.

Challenges if Inheritance Tax is Reintroduced

Many Indian businesses are family-run, so bringing back estate duty could hinder the country's economic growth. This is because some Indian promoters might choose to change their residency or move their businesses abroad to avoid inheritance taxes. Additionally, some argue that it's unfair to impose inheritance tax on assets for which the deceased has already paid income and wealth taxes, essentially resulting in double taxation.

Calculation of Inheritance Tax

To calculate inheritance tax, it is crucial to start by determining the total market value of all assets owned by the deceased at the time of their death. This assessment should include all the assets such as real estate properties, investment holdings (stocks, bonds, mutual funds, etc.), current bank balances, vehicles, and personal belongings (jewellery, art, and other valuable items).

After arriving at the estate's net value by subtracting liabilities from assets, the next step is to apply the prevailing inheritance tax rate. In some cases, thresholds or allowances may exempt a portion of the estate from taxation, or the rate may be progressive based on the estate's value.

Moreover, tax planning strategies such as gifting or setting up trusts may be employed by the deceased to legally minimise the inheritance tax burden, which should also be considered.

Illustration

Let’s say Mr. Ramesh recently inherited a property worth Rs. 10 crores upon his father's death. Assuming inheritance tax of 10% on any property inherited over and above Rs. 5 crores, then inheritance tax will be applicable in this case as under:

Taxable Inheritance amount after exemption - 5 Crores

Rate of Inheritance tax - 10%

Tax payable on Inheritance by Mr. Ramesh = 10% of 5 crores = Rs. 50 lacs

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