Inheritance Tax (also referred to as Estate Tax) is a tax which is levied at the time of inheriting any asset. Inheritance Tax is not levied in India as any amount received under a Will or by way of inheritance or in contemplation of death of the payer is exempted under Section 56(ii) from the levy of any Income Tax.
- Recommended Read: Tax Exemptions on receipt of Gifts
Tax on Income arising out of Inherited Assets
Although no tax is levied on receiving the inherited assets in India, but income tax would be levied on the receipt of any income arising from such inherited assets. This can be explained with the help of the following example.
For eg: Mr. A bought a property for Rs. 1 Crore in 2003. He died in 2015 and the property was gifted to his son Mr B. The Market Value of this property in 2015 at the time of death of Mr A was Rs. 2 Crores. This property was on Rent and the monthly rent received was Rs. 1 Lakhs per month.
No Income Tax would be levied on the receipt of property as Inheritance Tax is not applicable in India. On transfer of this property from father to son, the son will start receiving the rent. This rent received by the son would be added to the income of the son and taxed as per the income tax slab rates of the son.
The person receiving the income arising out of such inherited property would also be required to file Income Tax Return at the end of the year and disclose the incomes earned during the year in the Income Tax Return.
- Recommended Read: Income Tax efiling Online in 6 Simple Steps
Capital Gains on Sale of Inherited Assets
When the son sells this property, he would be liable to pay Capital Gains on the sale of this property. The cost for which the father had purchased the property would be treated as the cost of acquisition. This cost would also be allowed to be indexed to compute the capital gains.
The Capital Gains in this case would be computed as follows
|Full Value of Consideration||xxx|
|(Less)||Expenditure wholly and exclusively incurred in connection with such Sale||(xxx)|
|(Less)||Indexed Cost of Acquisition||(xxx)|
|(Less)||Indexed Cost of Improvement||(xxx)|
|Gross Short Term Capital Gains||xxx|
|(Less)||Exemption (if any) available under Section 54, 54EC, 54F||(xxx)|
|Net Taxable Capital Gains||xxx|
For a detailed read on computation of Capital Gains, kindly refer this article – Computation of Capital Gains Tax in India.
Other Relevant Points
- In case the asset is received by more than 1 individual, the tax would be levied in the hands of each person in equal proportions. For eg: If in the above mentioned example, there were 3 sons, the rent and capital gains will get divided into 3 parts and the tax on rental income and capital gains tax will also get divided into 3 parts.
- If the son Mr. B does not sell the property but rather gifts the same to his son Mr. C, tax in such a case would not be levied. In other words, the property purchased by Mr. A is now being owned by Mr. C. In such a case as well, the same above mentioned provisions will apply i.e. the rental income would be taxed in the hands of Mr. C and no tax would arise on transfer from Mr. B to Mr. C. Capital Gains Tax would only be levied on the sale of property from Mr. C to some outsider.
- Inheritance Tax was earlier applicable in India from 1953 to 1985. It is still applicable in some countries.
- There are rumours that Inheritance Tax may be re-introduced in India. However, if re-introduced Govt will have to give some basic exemptions and levy tax only above a specified thresh-hold.