Inheritance Tax in India: What You Need to Know?

Inheritance Tax is often considered one of the more complex and dreaded aspects of estate planning in India. Yet, understanding its nuances can save both you and your heirs significant sums of money in the long run. So, let’s dive into what IHT is, how it works, and what you can do to manage its impact on your estate.

What is the Inheritance Tax in India?

In India, Inheritance Tax refers to the tax levied by the government on the transfer of assets from a deceased individual to their heirs or beneficiaries. However, there is no specific nationwide Inheritance Tax in India.

Historically, India did have an Estate Duty Act, which was in force from 1953 to 1985. This act imposed a tax on the estate of a deceased person, but it was abolished in 1985. Since then, there has been no direct inheritance tax at the national level.

However, it’s important to note that certain indirect taxes may apply to inheritances in India:

• Income Tax: Inherited assets may generate income, such as rent from property or interest from investments. Any income generated from inherited assets is subject to income tax in the hands of the recipient, based on the prevailing income tax rates and slabs.
• Gift Tax: While there is no specific inheritance tax, India does have a Gift Tax Act. Any gifts received during one’s lifetime may be subject to gift tax if the value exceeds certain thresholds. However, there are exemptions and exclusions available under the Gift Tax Act, such as gifts received from relatives, gifts received on marriage, gifts received under wills, etc.
• Wealth Tax (abolished): India used to have a Wealth Tax Act that imposed a tax on the net wealth of individuals and Hindu Undivided Families (HUFs). However, this tax was abolished with effect from April 1, 2015.
• Stamp Duty: In certain states in India, there may be stamp duty payable on documents related to the transfer of assets, including inherited property or investments.

It’s worth mentioning that some states in India have introduced their own laws related to inheritance and succession, such as the Hindu Succession Act for Hindus, the Indian Succession Act for Christians, and personal laws for Muslims. These laws govern matters of inheritance, succession, and wills within their respective communities.

How Inheritance Taxes Are Calculated in India

In India, there is no specific nationwide inheritance tax. However, certain indirect taxes and duties may apply to inheritances. Here’s how these taxes are typically calculated:

• Income Tax on Inherited Assets: Any income generated from inherited assets, such as rent from property, dividends from shares, or interest from investments, is subject to income tax. The tax is calculated based on the income tax rates and slabs applicable to the recipient of the income. The recipient must declare the income from inherited assets in their income tax return and pay tax accordingly.
• Gift Tax: While there is no specific inheritance tax, India has provisions for gift tax under the Income Tax Act. If an individual receives a gift of money or assets during their lifetime and the value exceeds certain prescribed limits, it may be subject to gift tax. The tax is calculated based on the value of the gift and the relationship between the donor and the recipient. However, certain exemptions and exclusions apply, such as gifts received from relatives, gifts received on marriage, gifts received under wills, etc.
• Stamp Duty: In India, stamp duty is payable on certain documents related to the transfer of assets, including inherited property or investments. The rate of stamp duty varies from state to state and depends on the nature and value of the transaction. It is calculated as a percentage of the market value of the asset being transferred.
• Capital Gains Tax: If inherited assets, such as property or investments, are sold or transferred at a higher value than their acquisition cost, capital gains tax may be applicable. Capital gains tax is calculated based on the difference between the sale price and the cost of acquisition, adjusted for any improvements or indexation. The tax rate depends on whether the asset is classified as short-term or long-term, and the applicable rates may vary.
• Wealth Tax (abolished): India used to have a wealth tax on the net wealth of individuals and Hindu Undivided Families (HUFs). However, this tax was abolished with effect from April 1, 2015, and is no longer applicable.

Inheritance Under HUF Laws in India

The Hindu Succession Act, of 1956 lays down the rules for the distribution of property among Hindu family members. It applies to Hindus, Buddhists, Jains, and Sikhs, as well as those who are not Muslims, Christians, Parsis, or Jews by religion.

Here’s a brief overview of how inheritance under HUF laws works in India:

Creation of HUF

• HUF is a legal entity that consists of all persons lineally descended from a common ancestor, including their wives and unmarried daughters.
• HUF is automatically formed upon the marriage of a Hindu male, and it continues to exist even after his death.
• A Hindu joint family can also be converted into a HUF by a joint declaration of the family members.

Property of HUF

• The property of an HUF includes both ancestral property (property inherited from ancestors) and self-acquired property (property acquired by the HUF through its own efforts or funds).
• Ancestral property remains the property of the HUF, and each member has a right in it by birth.

Succession and Inheritance

• Upon the death of a coparcener (a person who shares equally in the ancestral property), his share in the ancestral property devolves by survivorship to the surviving coparceners.
• In the case of self-acquired property of the deceased coparcener, the rules of succession depend on whether the deceased left a will or died intestate (without leaving a will).
• If the deceased coparcener leaves a will, the property devolves according to the terms of the will. If there is no will, the property devolves according to the rules of intestate succession under Hindu law.

Mitakshara and Dayabhaga Schools

• In India, there are two main schools of Hindu law concerning inheritance and succession: Mitakshara and Dayabhaga.
• Under the Mitakshara school, ancestral property is inherited by the male descendants of a common ancestor, with sons having equal rights.
• Under the Dayabhaga school (practised mainly in Bengal), there is no concept of joint family property, and each son is treated as a separate legal entity.

Partition

• Coparceners of a HUF have a right to demand a partition of the HUF property. Partition can be either partial or total.
• Upon partition, each coparcener is entitled to a share of the HUF property, which then becomes his separate property.

Tax Implications

• HUFs have certain tax benefits under the Indian Income Tax Act, including separate tax exemption limits and deductions.
• Income earned by the HUF is taxed separately from the income of its individual members.

Inheritance Under Sharia Laws for Muslims

In India, inheritance laws for Muslims are governed by personal laws derived from Islamic principles, primarily based on the Sharia. These laws vary depending on the sect to which the individual belongs and the customs followed within their community. The key principles governing inheritance under Muslim personal law are outlined below:

• Intestate Succession: If a Muslim individual passes away without leaving a valid will, their estate will be distributed according to the rules of intestate succession under Muslim personal law.
• Sharers and Residuaries: In Islamic inheritance law, heirs are categorised into two groups: sharers (who are entitled to a fixed share of the estate) and residuaries (who inherit what remains after the sharers have taken their shares).
• Sharers: The sharers are entitled to specific shares of the deceased’s estate. The primary sharers typically include the spouse, children (both sons and daughters), parents, and in some cases, the grandparents. The shares allocated to each sharer depend on their relationship to the deceased.
• Residuaries: After the shares of the sharers have been distributed, the remaining estate, known as the residue, is inherited by the residuaries. Residuaries may include distant relatives or other individuals entitled to inherit under Islamic law.
• Rights of Women: Muslim personal law recognises the right of women to inherit from the estate of their deceased relatives. However, the share allocated to female heirs may differ from that of male heirs, depending on their relationship to the deceased and the presence of other heirs.
• Exclusions: Certain individuals, such as non-Muslims, illegitimate children, and those who have been involved in the murder of the deceased, may be excluded from inheriting under Muslim personal law.
• Will: Muslim individuals have the option to make a will (known as a “Wasiyat”) to distribute their estate according to their wishes. However, there are restrictions on the portion of the estate that can be disposed of through a will, as a certain portion of the estate must be distributed according to the rules of intestate succession.

Inheritance on Tax Return in India

In India, inheritance itself is not typically subject to taxation at the national level. However, certain income earned from inherited assets may be taxable, and there are reporting requirements related to inheritance on tax returns. Here’s an overview of how inheritance is treated on tax returns in India:

• Income from Inherited Assets: Any income generated from inherited assets, such as rent from property, dividends from shares, or interest from investments, is taxable under the Income Tax Act, 1961. This income must be reported on the appropriate schedules of the income tax return, such as Schedule HP for income from house property, Schedule CG for capital gains, or Schedule OS for other sources of income.
• Capital Gains: If inherited assets, such as property or investments, are sold or transferred at a higher value than their acquisition cost, capital gains tax may be applicable. The capital gains must be calculated and reported on the income tax return, and tax must be paid accordingly.
• Gift Tax: While there is no specific inheritance tax in India, gifts received during one’s lifetime may be subject to gift tax under the Income Tax Act. However, certain exemptions and exclusions apply to gifts received from relatives, gifts received on marriage, gifts received under wills, etc. Any taxable gifts must be reported on the appropriate schedules of the income tax return.
• Foreign Inheritance: If an individual receives an inheritance from a foreign country, they may be required to report it on their Indian tax return. Foreign assets and income must be disclosed as per the provisions of the Income Tax Act and the Foreign Exchange Management Act (FEMA).
• Wealth Tax (abolished): India used to have a wealth tax on the net wealth of individuals and Hindu Undivided Families (HUFs). However, this tax was abolished with effect from April 1, 2015, and is no longer applicable.
• Disclosure Requirements: Taxpayers are required to disclose all sources of income, including inherited assets and income, in their tax returns. Failure to disclose inherited assets and income could lead to penalties and legal consequences.
• Legal Documentation: It’s essential to maintain proper documentation related to inherited assets, such as wills, probate certificates, property deeds, and bank statements, as these may be required to support the information provided in the tax return.

Tax on Inheritance of Immovable Property

In India, the inheritance of immovable property, such as land, buildings, and real estate, may trigger certain tax implications, particularly in the form of stamp duty and capital gains tax. Here’s an overview of the taxes applicable to the inheritance of immovable property:

• Stamp Duty: Stamp duty is a tax levied by state governments on the transfer of immovable property. When inherited property is transferred to legal heirs, the transaction is subject to stamp duty, which varies from state to state. The stamp duty is calculated as a percentage of the market value of the property or the consideration amount, whichever is higher. Legal documents, such as gift deeds or transfer deeds, must be stamped with the appropriate stamp duty before they can be registered with the relevant authorities.
• Capital Gains Tax: If inherited immovable property is sold or transferred at a higher value than its acquisition cost, capital gains tax may be applicable. Capital gains tax is levied on the profit earned from the sale of the property and is categorised as short-term capital gains (if the property is held for less than two years) or long-term capital gains (if the property is held for more than two years). The tax rates and calculations for capital gains tax vary based on the holding period and the nature of the property.
• Income Tax on Rental Income: If inherited property is rented out, the rental income earned is taxable under the Income Tax Act, 1961. The rental income must be added to the total income of the recipient and taxed at the applicable income tax rates and slabs. Deductions for expenses related to the property, such as maintenance costs and property taxes, may be available to reduce the taxable rental income.
• Wealth Tax (abolished): India used to have a wealth tax on the net wealth of individuals and Hindu Undivided Families (HUFs), which included immovable property. However, the wealth tax was abolished with effect from April 1, 2015, and is no longer applicable.

Tax on Inheritance of Movable Assets in India

In India, the inheritance of movable assets, such as cash, jewellery, vehicles, investments, and personal belongings, does not typically trigger specific inheritance tax. However, there are certain tax implications that may arise from the inheritance of movable assets:

• Income Tax on Interest and Dividends: If inherited investments, such as fixed deposits, savings accounts, mutual funds, or stocks, generate interest or dividends, the income earned is taxable under the Income Tax Act, of 1961. The recipient of the income must declare it in their income tax return and pay tax at the applicable income tax rates and slabs.
• Capital Gains Tax: If inherited movable assets, such as stocks, mutual funds, or jewellery, are sold or transferred at a higher value than their acquisition cost, capital gains tax may be applicable. Capital gains tax is levied on the profit earned from the sale of the asset and is categorised as short-term capital gains (if the asset is held for less than two years) or long-term capital gains (if the asset is held for more than two years). The tax rates and calculations for capital gains tax vary based on the holding period and the nature of the asset.
• Gift Tax: While there is no specific inheritance tax in India, gifts received during one’s lifetime may be subject to gift tax under the Income Tax Act. However, certain exemptions and exclusions apply to gifts received from relatives, gifts received on marriage, gifts received under wills, etc.
• Wealth Tax (abolished): India used to have a wealth tax on the net wealth of individuals and Hindu Undivided Families (HUFs), which included movable assets such as jewellery and cash. However, the wealth tax was abolished with effect from April 1, 2015, and is no longer applicable.
• Documentation and Reporting: While there may not be specific taxes on the inheritance of movable assets, it is essential to maintain proper documentation related to the inheritance, such as wills, probate certificates, and gift deeds. Additionally, any income or gains generated from inherited assets must be accurately reported in the income tax return to ensure compliance with tax laws.

Inheritance Tax vs. Estate Tax in India

In India, there is no specific tax known as “inheritance tax” or “estate tax” at the national level. However, there are indirect taxes and duties that may apply to inherited assets and estates. Let’s distinguish between the concepts of inheritance tax and estate tax:

• Inheritance Tax: Inheritance tax is a tax levied on the transfer of assets from a deceased individual to their heirs or beneficiaries. This tax is typically based on the value of the inherited assets and is paid by the recipients of the inheritance. Inheritance tax can vary depending on the relationship between the deceased and the heir, the value of the assets inherited, and any exemptions or reliefs provided by the tax laws.
• Estate Tax: Estate tax, also known as “death duty” or “inheritance tax” in some countries, is a tax levied on the estate of a deceased person before the assets are distributed to their heirs or beneficiaries. Unlike inheritance tax, which is paid by the recipients of the inheritance, estate tax is paid out of the estate itself. Estate tax is based on the total value of the deceased person’s estate, including all assets and liabilities, and is calculated before any distributions are made to the heirs.

In India, while there is no specific inheritance tax or estate tax at the national level, there are indirect taxes and duties that may apply to inherited assets and estates:

• Stamp Duty: Stamp duty is a tax levied by state governments on various transactions, including the transfer of immovable property such as land and buildings. When inherited property is transferred to legal heirs, the transaction may be subject to stamp duty, which varies from state to state.
• Capital Gains Tax: If inherited assets, such as property or investments, are sold or transferred at a higher value than their acquisition cost, capital gains tax may be applicable. Capital gains tax is levied on the profit earned from the sale of the asset and is calculated based on the holding period and the nature of the asset.
• Income Tax on Rental Income and Interest: Any income generated from inherited assets, such as rental income from property or interest from investments, is taxable under the Income Tax Act, 1961. The income earned must be declared in the income tax return and taxed at the applicable rates.

Avoiding Inheritance Tax in India Through Loopholes

While it’s not possible to completely avoid these taxes, there are legal strategies and planning techniques that individuals can employ to minimise their impact. Here are some ways to potentially reduce the tax burden associated with inherited assets:

• Lifetime Gifts: Making gifts of assets during your lifetime can help reduce the value of your estate for tax purposes. In India, gifts received from relatives are generally exempt from gift tax. By gifting assets strategically to your heirs, you can gradually transfer wealth and reduce the size of your taxable estate.
• Setting up Trusts: Establishing a trust can be an effective way to hold and manage assets for the benefit of your heirs. Certain types of trusts may provide tax advantages, such as reducing the value of your estate for tax purposes or allowing for tax-efficient distribution of assets to beneficiaries.
• Estate Planning: Proper estate planning involves structuring your assets and affairs in a tax-efficient manner to minimise tax liabilities for your heirs. This may include creating a will, setting up trusts, and making use of exemptions and deductions available under the tax laws.
• Utilising Exemptions and Deductions: Taking advantage of exemptions and deductions available under the tax laws can help reduce the tax burden on inherited assets. For example, exemptions may be available for certain types of assets or for specific categories of heirs. Additionally, deductions for expenses related to the administration of the estate may help lower the overall tax liability.
• Investing in Tax-efficient Assets: Choosing tax-efficient investment options can help reduce the tax impact on inherited assets. For example, investing in tax-free bonds, certain types of mutual funds, or tax-saving instruments like Equity Linked Saving Schemes (ELSS) may help minimise tax liabilities.
• Seek Professional Advice: Tax laws and regulations are complex and subject to change. Consulting with a qualified tax advisor or financial planner can help you navigate the intricacies of estate planning and inheritance taxation. A professional advisor can assess your individual circumstances, identify tax-saving opportunities, and develop a tailored strategy to minimise tax liabilities for your heirs.

Pay Inheritance Tax in India with NoBroker

In India, there is no specific nationwide “inheritance tax,” but certain indirect taxes and duties may apply to inherited assets, such as capital gains tax, stamp duty, and income tax on rental income. In the context of inherited property, individuals may require legal assistance for tasks such as transferring property titles, updating ownership records, and fulfilling any legal obligations related to the inheritance.

Additionally, payment services may be required to facilitate transactions such as stamp duty payments, registration fees, and other expenses associated with property transfers. NoBroker’s legal department can assist individuals with these aspects of property inheritance, ensuring compliance with legal requirements and facilitating smooth and secure transactions. Additionally, consulting with a qualified legal advisor or chartered accountant from NoBroker may provide further guidance on navigating inheritance-related matters in India. 

Contact NoBroker today to explore how their services can streamline your inheritance process and ensure compliance with legal requirements. Don’t let uncertainty impede your estate planning efforts—take proactive steps with NoBroker’s support to secure your legacy effectively.

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