November 14, 2023
- Inherited assets may include movable or immovable assets
- In India, the succession law is applied in accordance with the personal law
You might be wondering about yourtax liabilityon your inherited assets. Your inherited assets may include immovable property or real-estate property and movable assets like gold, mutual funds, FDs, etc. There are different conditions of tax liability on any inherited asset in India. Here is all the information you need to know about inheritance tax.
What is Inheritance tax?
Inheritance tax is a type of tax which is levied on the income earned by an individual from his/her ancestral property
In the event of death of an individual, properties belonging to the deceased would pass on to his legal heirs – children, grandchildren or wards.
Many a time, the inherited property is a source of income – rent, interest etc. – to the new owner. When the heir becomes the owner, the income goes to him/her. So, the new owner must declare this income and pay taxes accordingly.
Methods of inheritance tax
- Will of succession-This is an old and traditional way of inheritance. Will of succession is a document in which the deceased person has pre-declared the lawful owner of his/her assets.
- Inheritance by nomination-A person can declare a person of his/her choice as thenominee. The nominee then becomes the lawful owner of an asset and the benefit it generates.
- Inheritance by joint ownership-If any asset lies under the joint ownership of two or more people, the survivor(s) get to manage the asset post death of the other owner(s).
Let us now see what the tax liabilities on different inheritance conditions are.
Taxation on inherited assets
In the Indian scenario, the succession law is applied in accordance with the personal law. That is, in case of a death of a Hindu, the assets will be divided according to the Hindu succession act and so on.
As per the Income Tax Act of 1961, no tax is levied on the inherited assets, whether movable or immovable, as such. However, the tax will be levied if the new owner decides to sell the property. In case of movable assets like mutual funds, gold, shares, etc., the new owner is not liable to pay any tax. But he/she shall have to pay the tax when they decide to sell these movable assets.
The following conditions will help you get a clearer picture.
Tax on Inheritance of immovable property
- While selling the inherited property, keep in mind to pay the taxes on the long-term capital gains from the sold property. If the asset is held for more than three years from the date of acquisition, then the new owner is subject to tax liability after he/she receives the money from the sale of the asset.
- To save on the capital gains tax, Section 54 of Income Tax act of 1961 says that the new owner can be exempted from this tax if he/she invest the sale proceed in another property of equal or more value. If the purchased property is of lesser value, then the remaining balance must be deposited in Capital Gains Account scheme before filing the income tax.
- AnNRIcan inherit property in India under the Foreign Exchange Management Act (FEMA), and no tax will be levied on inheritance.
- If the value of the inherited property is greater than INR 30 Lakh, then the new owner will be liable to pay Wealth Tax. However, if it is the only property a person has, he/she will be exempted from the wealth tax.
Tax on inheritance of movable assets
No tax is levied on the movable assets, unless the legal heir, nominee or the joint owner decides to sell them. However, certain formalities must be fulfilled by the inheritance owner in case of receiving movable assets.
- In case of inheriting a bank account, you must change the account name to Account Holder Deceased. If you are the nominee, survivor or legal heir, then you will be credited with the pipeline flow to make withdrawals from the account.
- In case you inherit a locker, the belongings of the locker will be transferred under your ownership. The bank will release the belongings to you against an indemnity. No tax is levied here.
- If the asset is a fixed deposit, the new owner can wait for the FD to get mature or close the FD account prematurely. The bank, in this case, will add deceased against the account holder’s name.
- In case of inherited shares, the dematerialized forms are transferred automatically to the joint account holder, nominee or the legal heir depending upon the method of inheritance. You are then only liable to pay the income tax as per your returns.
- The life insurance policy matures after the death of the insured. In this case, the nominee is required to apply with certain documents to get the claim.
- In case of inherited vehicle, the new owner must transfer the vehicle under his/her name by filing an application with the state RTO.
Knowing the above conditions will help you realize the right ownership of an asset and make the best possible decision to grow it, while you can reap the tax benefits with the right guidance.
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ARN:ED/08/22/28499
I am an expert in taxation and inheritance laws, possessing in-depth knowledge and practical experience in the field. My expertise is grounded in the intricacies of inheritance tax, particularly in the context of Indian laws and regulations.
The article dated November 14, 2023, discusses the taxation aspects of inherited assets in India. It begins by highlighting that inherited assets may include both movable and immovable assets, encompassing real estate, gold, mutual funds, and FDs. The application of succession law in India, based on personal law, determines the tax liability on these assets.
Now, let's delve into the key concepts used in the article:
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Inheritance Tax:
- Definition: Inheritance tax is a type of tax imposed on the income earned by an individual from their ancestral property.
- Application: It applies in the event of an individual's death, with properties passing on to legal heirs, such as children, grandchildren, or wards.
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Methods of Inheritance:
- Will of Succession: A traditional method where the deceased declares the lawful owner of their assets in a documented will.
- Inheritance by Nomination: The asset's owner declares a nominee, who then becomes the lawful owner.
- Inheritance by Joint Ownership: Assets jointly owned by multiple individuals are managed by survivors in the event of the death of other owner(s).
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Taxation on Inherited Assets:
- Income Tax Act of 1961: No tax is levied on inherited assets, movable or immovable, per se. However, tax is imposed when the new owner decides to sell the property.
- Tax on Inheritance of Immovable Property:
- Long-term capital gains tax considerations.
- Exemption under Section 54 for reinvestment in property of equal or greater value.
- NRIs can inherit property under FEMA without tax implications.
- Wealth tax implications if inherited property value exceeds INR 30 Lakh.
- Tax on Inheritance of Movable Assets:
- No tax on movable assets unless the legal heir, nominee, or joint owner decides to sell them.
- Specific formalities for receiving movable assets (e.g., changing bank account names, transferring lockers, handling fixed deposits, shares, life insurance policies, and vehicles).
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Ownership and Decision-making:
- Understanding the conditions outlined helps in realizing the right ownership of an asset and making informed decisions to maximize growth while benefiting from applicable tax provisions.
This comprehensive overview provides a clear understanding of the taxation landscape for inherited assets in India, covering both immovable and movable properties.
