Inheritance: Tax Implications Of Unexpected Assets

Sarah Patrick, a 67-year-old widow from Mumbai, recently lost her 94-year-old mother. Amidst her grief, Sarah finds comfort in the cherished memories and unexpected gifts her mother left her: an apartment and some gold jewelry. These belongings serve as a touching reminder of her mother's love and their shared bond. However, as Sarah delves into managing her inheritance, she realizes there might be tax implications to consider. Does she need to pay inheritance tax? What if she decides to sell the assets she inherited? Are there short- or long-term capital gains taxes involved? Let's explore the taxation aspects surrounding her inheritance.

Inheritance tax is a tax imposed on assets or property passed on by someone who has passed away to their legal heirs, such as children or grandchildren. The good news is that there is no inheritance tax in India, although many developed countries still have it. This tax was done away with in 1985. Before that, under the Estate Duty Act of 1953, the executors of the deceased's estate had to pay a high 'estate duty' of up to 85 per cent of the value of the inherited property.

Even though the assets passed on to legal heirs could be seen as gifts since they are received without any payment, no gift tax is charged because the Income-tax Act of 1961 excludes assets received as inheritance or through a will from the scope of gifts. Therefore, these assets are not considered income, and you won't have to pay any tax on them.

Says Abhishek Soni, CEO, Tax2Win, an income tax portal: “At present, the good news for inheritors is that India does not have any inheritance tax. As per the Income Tax Act 1961, no tax is imposed on inherited assets, whether they are movable or immovable. This exemption provides relief to legal heirs from an immediate tax burden arising upon receiving the inherited wealth. This means legal heirs do not have to pay any tax for inheriting any property, but they have to pay tax when any income is generated in the form of interest or rent from such property.” 

“Notably, the landscape of inheritance tax has evolved over the years. In the past, a substantial 'estate duty,' reaching up to 85 per cent of the value of the inherited property, was imposed on the executors of the deceased's estate as per the Estate Duty Act, 1953. However, this hefty tax was discontinued in 1985, marking a positive shift in the taxation system,” adds Soni. 

It's important to note that while no tax is levied at the time of inheritance, taxes may come into play if the new owner or legal heir decides to sell the inherited property. In the case of immovable assets, such as land or real estate, capital gains tax is applicable when the property is sold, and income tax is applicable if you rent the property. Similarly, for movable assets like mutual funds, gold, shares, etc., the new owner or legal heir has to pay the tax when they decide to sell these assets.

However, it's possible that the inherited asset or property can generate income. For example, if you inherit a rented-out house and become its owner, the rental income will be added to your income and taxed at the applicable rate. Similarly, if you receive bank deposits or assets earning interest, that income will also be added to your taxable income. So, any income generated by the inherited property or asset will be taxable in your hands.

After inheriting a property or asset, you can decide to sell it in the future. If you do, any profit or loss from the sale will be yours. If there's a profit, you'll need to pay capital gains tax. Whether it's short-term or long-term capital gain depends on how long the asset was held. To calculate this, the original purchase date by the deceased will be considered as your acquisition cost.