How Do Wills and Inheritance Affect Tax Liability in India?

In India, the transfer of property upon inheritance or through a will is subject to certain tax laws. However, there are no direct inheritance taxes in India. The impact on tax liability primarily depends on the nature of the assets inherited and the way they are disposed of in the future. Understanding how wills and inheritance affect tax liability is crucial for both the person making the will and the beneficiaries.

Impact of Wills and Inheritance on Tax Liability:

No Inheritance Tax in India:

India does not impose a specific inheritance tax. This means that when a person inherits property or assets through a will, the recipient does not have to pay tax simply for receiving the property.

In the absence of an inheritance tax, the tax implications are primarily concerned with how the inherited property is handled later (for example, if it is sold or rented out).

Tax on Inherited Property - Capital Gains Tax:

Although there is no inheritance tax, the sale of inherited property may attract capital gains tax. This depends on the holding period and the sale value of the property.

Capital Gains Tax:

When an inherited property is sold, the recipient (or heir) will be required to pay capital gains tax based on the difference between the sale price and the property's cost of acquisition.

The cost of acquisition for inherited property is deemed to be the fair market value (FMV) of the property on the date of the ancestor's death.

The holding period of the deceased is also considered for determining whether the capital gain is short-term or long-term:

• Long-term Capital Gain (LTCG): If the property is held for more than two years (in case of immovable property), the gain will be taxed as long-term capital gain.
• Short-term Capital Gain (STCG): If the property is sold within two years, the gain will be treated as short-term capital gain.

Tax on Income from Inherited Assets:

If the inherited property generates income, such as rental income or interest, it will be subject to income tax in the hands of the inheritor.

The income tax rate applicable will depend on the total income of the recipient, and the rental income or other income from the inherited property will be added to the individual's total income, subject to the applicable tax slab.

Stamp Duty and Registration Charges on Inherited Property:

Even though there is no inheritance tax in India, the transfer of property under a will may require the payment of stamp duty and registration fees, depending on the state's laws.

Will Registration:

While registering a will is not mandatory, if a will is registered, it can reduce disputes. However, it does not incur stamp duty fees unless the will involves the transfer of property rights.

Succession Planning and Tax Implications:

While wills do not attract direct taxes, proper succession planning can help in minimizing future tax liabilities. Estate planning tools such as trusts can sometimes be used to transfer wealth in a tax-efficient manner, avoiding large capital gains taxes.

Relief in Capital Gains Tax for Inherited Property:

Under the Income Tax Act, the cost of acquisition for inherited property is considered as the fair market value (FMV) on the date of death of the deceased individual. This helps in minimizing capital gains as the inherited property may have appreciated significantly, and the tax liability would be based on the current market value rather than the original purchase price of the deceased.

Additionally, if the property is sold long after inheriting it, the beneficiary may be eligible for deductions under Section 54 (for residential property) to reduce capital gains.

Tax Implications for Foreign Assets Inherited:

If a person inherits assets located outside India, the tax implications will depend on the tax laws of the country where the asset is located, as well as Indian tax laws.

The Indian tax system treats the global income of Indian residents as taxable, so any income generated from foreign inherited assets will be taxed in India.

Example:

• Example 1: Suppose a person inherits a flat from their parent, and the FMV of the flat at the time of inheritance is ₹50 lakh. After 5 years, the inheritor sells the flat for ₹70 lakh. The capital gain will be calculated as the difference between the sale price and the FMV on the date of the parent's death (₹70 lakh - ₹50 lakh). The capital gain will be long-term (since the property was held for more than 2 years) and taxed at 20% with indexation benefits.
• Example 2: If a person inherits a plot of land worth ₹40 lakh and sells it after 3 years for ₹60 lakh, the capital gains tax will apply on the difference (₹60 lakh - ₹40 lakh). Since the plot was held for over 2 years, the gain will be considered long-term capital gains and subject to 20% tax with indexation.
• Example 3: A person inherits a business from their parent. The income generated from the inherited business, such as profits from sales, will be subject to income tax at the applicable tax rate for the inheritor's total income. The business itself will not be subject to inheritance tax.

Conclusion:

In India, there is no inheritance tax. However, capital gains tax may apply when inherited assets are sold. The cost of acquisition for such assets is the fair market value on the date of inheritance, which can help reduce tax liabilities. Income generated from inherited assets, such as rental income, is taxable under income tax. Proper estate planning and succession planning can help in reducing potential tax liabilities when transferring assets through wills or inheritance.