Are Inherited Assets Subject to Taxation in India?

In India, inherited assets are generally not subject to a specific inheritance tax, but there are important tax implications when these assets are sold or generate income. While property inheritance itself does not attract a direct inheritance tax, the sale or transfer of inherited property and income generated from these assets may be subject to taxation under various provisions of the Income Tax Act.

Tax Implications of Inherited Assets in India:

No Inheritance Tax:

India does not impose an inheritance tax, so receiving an asset through inheritance (whether cash, property, jewelry, or securities) does not attract any tax simply for receiving it.

There is no inheritance tax or estate tax in India at the time of transfer of property through wills or inheritance.

Capital Gains Tax on Sale of Inherited Assets:

Although inheritance itself is not taxable, the sale of inherited assets can attract capital gains tax.

The cost of acquisition for the inherited asset is considered to be the fair market value (FMV) on the date of the deceased person’s death. This FMV is considered as the cost of acquisition for calculating capital gains tax when the asset is sold in the future.

Capital gains tax is divided into short-term capital gains (STCG) and long-term capital gains (LTCG):

• Short-Term Capital Gains (STCG): If the inherited asset is sold within two years of inheritance, the capital gain is classified as short-term and taxed at the applicable rate.
• Long-Term Capital Gains (LTCG): If the asset is held for more than two years, the capital gain will be considered long-term and subject to 20% tax with indexation benefits (if applicable).

Example:

If you inherit a flat valued at ₹50 lakh and sell it for ₹70 lakh after 5 years, the capital gain would be ₹20 lakh (₹70 lakh - ₹50 lakh). The long-term capital gain would be taxed at 20% with indexation, based on the FMV of the property on the date of the decedent’s death.

Income Tax on Income from Inherited Assets:

If the inherited asset generates income, such as rental income, interest, or dividends, the income is taxable in the hands of the person inheriting the asset.

For example, if a person inherits a house and rents it out, the rental income is taxable as part of the inheritor's total income under Income from House Property in their Income Tax Return (ITR).

Similarly, interest income from inherited bonds or dividends from inherited stocks will also be taxable in the hands of the recipient.

Gift or Inherited Property – Stamp Duty and Registration:

While inheritance itself does not attract tax, the transfer of property may require stamp duty and registration fees depending on the state's laws. For real estate properties, the inheritor may need to pay stamp duty to get the property legally transferred to their name.

Will Registration:

The process of registering a will (while not mandatory) can help reduce potential disputes, but it does not attract stamp duty unless property rights are being transferred at the time of registration.

Transfer of Inherited Property to Others:

If an inherited asset is subsequently gifted to someone else, the gift may be subject to tax if it exceeds ₹50,000 and is given to a non-relative.

The recipient of such a gift will be required to pay gift tax if the asset is not passed to a relative and exceeds the threshold of ₹50,000, and if the asset is sold later, capital gains tax would apply.

Special Provisions for Foreign Assets:

If a person inherits foreign assets, these are also subject to Indian tax laws, as India taxes the global income of its residents.

The income from inherited foreign assets will be taxed in India, and the asset’s sale may be subject to capital gains tax under Indian law. Additionally, depending on the country where the asset is located, there may be tax obligations in that country as well.

Example:

• Example 1: Suppose a person inherits a plot of land worth ₹50 lakh from their parent. The inheritor sells the plot for ₹70 lakh after 4 years. Since the plot is held for over two years, the capital gains tax will apply at 20% with indexation. The cost of acquisition will be the FMV of the plot on the date of the parent’s death.
• Example 2: If an individual inherits a bank account with ₹5 lakh in it, there is no tax due at the time of inheritance. However, if the inherited money generates interest income, that interest will be subject to income tax based on the individual’s total taxable income.
• Example 3: An individual inherits a house and rents it out. The rental income is taxable as income from house property under the Income Tax Act. The individual must declare this income in their ITR and pay tax as per their applicable tax slab.

Conclusion:

In India, inherited assets themselves are not subject to inheritance tax. However, once these assets are sold, they may be subject to capital gains tax based on their market value at the time of inheritance. Income generated from inherited assets, such as rental income or interest, is subject to income tax. The cost of acquisition for inherited property is the fair market value at the time of inheritance, and the holding period of the deceased is also considered for determining capital gains.

Proper estate planning and understanding the tax implications of inherited assets can help minimize tax liabilities for heirs.