Key takeaways
- An assessment of property acquired from a deceased person is known as an inheritance tax.
- An inheritance tax is assessed on the value of the inheritance received by the beneficiary, as opposed to the estate tax, which is assessed on the value of an estate and paid by it.
- The size of the inheritance and your relationship to the deceased will determine whether you must pay tax on inheritance; smaller sums received from close relatives are more likely to be excluded.
- By leaving money to heirs through trusts, insurance policies, or by making gifts during one’s lifetime, the taxes can be reduced or even completely avoided.
You might be concerned about the tax burden on the assets you have inherited. Your inherited assets can comprise real estate or immovable property, as well as movable assets like gold, mutual funds, certificates of deposit, etc. In India, there are various restrictions on the tax liability of any inherited asset. You can find all the information about tax on inheritance right here.
What is Inheritance tax?
A sort of tax known as the tax on inheritance is assessed on the income that a person receives from their ancestors’ property. Property belonging to a deceased person would be passed on to their lawful heirs, who could be children, grandchildren, or wards, in the event of death.
Many times, the inherited property serves as the new owner’s source of income in the form of rent, interest, etc. The income belongs to the heir once they take ownership. As a result, the new owner is required to report this income and pay taxes as necessary.
Methods of inheritance tax
Will of succession
This is a time-honoured and conventional method of inheritance. In a will of succession, the deceased person names the rightful owner of their property in advance.
Inheritance by nomination
A person can nominate someone of their choice (called a nominee). The asset and the benefit it produces are then legally owned by the nominee.
Inheritance by joint ownership
If an asset is owned jointly by two or more people, the survivor(s) is/are granted management of the asset following the passing of the other owner.
Taxation on inherited assets
In the Indian context, personal law and succession law are implemented together. That is if the policy holder dies without having proper will documentation, then the assets will be distributed following the Hindu Succession Act and other laws.
According to the Income Tax Act of 1961, there is no capital gains tax on inherited property as such, whether it is moveable or immovable. If the new owner chooses to sell the property, the tax will be imposed. The new owner is not required to pay any tax in the event of movable assets such as mutual funds, gold, shares, etc. However, when they choose to sell these mobile goods, they must pay taxes.
To help you see things more clearly, consider the following circumstances.
Tax on Inheritance of immovable property
Remember to pay taxes on the long-term capital gains from the sold property when selling the inherited property. The new owner is responsible for paying taxes on the proceeds of the asset’s sale if it is kept for a period of time beyond three years from the date of acquisition.
According to Section 54 of the Income Tax Act of 1961, the new owner can avoid paying capital gains tax if they invest the proceeds of the sale in another asset with an equivalent or greater value. The remaining balance must be deposited in a Capital Gains Account scheme before filing an income tax return if the purchased property is of lower value.
According to the Foreign Exchange Management Act (FEMA), an NRI can inherit property in India without paying inheritance taxes.
Tax on the inheritance of movable assets
The movable assets are not subject to tax unless they are sold by the legal heir, nominee, or joint owner. However, if acquiring movable assets, the inheritance owner must complete a number of formalities.
If you inherit a bank account, you must rename it to Account Holder Deceased. The pipeline flow to withdraw from the account will be attributed to you if you are the nominee, survivor, or legal heir.
If you inherit a locker, all of its contents will become your property. The bank will give you access to your possessions in exchange for an indemnity. Here, no tax is imposed.
Conclusion
Only inhabitants of six states are subject to tax on inheritance. Additionally, they primarily apply to distant relatives or others who had no connection to the deceased. The immediate family, parents, children, and spouses are frequently exempt. If they are taxed at all, siblings, grandkids, and grandparents are given preferential treatment (larger exemptions, lower rates).
Even so, relatively small inheritance amounts, sometimes as low as ₹500, can trigger inheritance taxes. Consider estate-planning techniques like gifts, insurance policies, and irrevocable trusts if you’re considering leaving a legacy that might be subject to tax on inheritance.
