1. 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.
2. 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 of an account without any consideration in return. Hence it could qualify as a gift for the purpose of income tax. However, provisions of Income tax Act, 1961, clearly exclude a case of transfer under a will or inheritance from the purview of gift tax. Accordingly, law does not provide for taxation of property received by way of inheritance.
3. 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.
Eg. Mr.Ram is the owner of a commercial complex that is given on rent. He had incurred a cost of Rs. 50 lakhs for the construction of the complex. He earns a monthly income of Rs.60000 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 of the nature of transfer by 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.
4. 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 of yours and the deceased’s ownership) will determine if capital gains will come under long-term capital gains tax or short-term capital gains tax.
Eg. Mr.A, inherited the property from his father on 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, 2018. Since the property has been held for a period of more than 24 months (holding period includes the holding period of the father too), the capital gain will be classified as long term. Accordingly, the legal heir can avail himself of indexation benefits while determining the capital gains.