Understanding Inheritance Taxes in India: A Simple Guide

It's natural to desire that your loved ones inherit your belongings and wealth after you pass away.

In countries like India, while there's no tax on simply inheriting property or assets, your legal successors may have to pay taxes on any income earned from those inherited assets.

In essence, this implies two things: India doesn't impose an actual inheritance tax, and taxes are only applicable if you generate any form of net income or profit from the inherited property or asset.

To simplify this, we've outlined the potential tax consequences of inherited property and how you can ensure legal compliance while safeguarding your loved ones' futures.

• What is Inheritance Tax in India?

Inheritance tax is a percentage of tax that a person must pay when inheriting property or assets. Depending on the country, this tax rate can be as high as 55%.

In many countries, when property or assets of a deceased individual pass on to their legal successors—children, siblings, spouse, etc.—an inheritance tax is due on the property or asset received from the deceased relative.

Presently, India doesn't levy any tax on inheriting property or assets to legal heirs, nominees, or beneficiaries. However, Indian tax laws do apply to any income earned from inherited assets or property.

For instance, if you inherit a house, you won't pay inheritance tax on it, but you will need to pay applicable taxes if you choose to rent out or sell the house.

• Declaring Inheritance on Tax Returns:

Will I be Taxed If I Sell my Inherited Property? As mentioned, no tax is imposed on inherited assets or property, whether movable or immovable. However, any profit from selling a capital asset is considered a capital gain.

Inherited property isn't seen as a capital gain since there's no sale, only a transfer of ownership. But if you inherit an asset and decide to sell it, capital gains tax will apply, as any property, once inherited, can always be sold.

Additionally, the duration you hold the property (the ownership period) determines whether the capital gains are categorized as long-term or short-term, and taxes are calculated accordingly.

Here are some methods to save on taxes if you opt to sell your movable or immovable assets.

Tax on Inheritance of Immovable Property Immovable assets usually refer to real estate or other properties like land, buildings, shops, etc.

To minimize capital gains tax, Section 54 of the Income Tax Act of 1961 allows the new owner to be exempt from this tax if they reinvest the sale proceeds in another property of equal or higher value.

If the newly acquired property or investment is of lesser value, then the remaining balance must be deposited in a capital gains account scheme before filing income tax.

Tax on Inheritance of Movable Assets Movable assets include mutual funds, gold, shares, bank accounts, or even a life insurance policy. Taxes levied on the sale of any of these assets depend on their nature, with different laws applicable accordingly.

For instance, in the case of a life insurance policy, you'll need to apply for a death benefit claim with specific documents, and the claim amount will be tax-exempt, as all death benefits are under Section 10(10D).

Conclusion :

Inheritance tax doesn't exist in India, so inheriting property or assets won't incur any taxes. However, if you decide to sell the asset or earn any income or profit from the inherited property, you must declare it on your tax returns.

Thus, understanding the conditions outlined in this article will assist you and your loved ones in navigating relevant tax laws and making the best decisions to preserve the inherited asset.