Do you have to pay inheritance tax if there is no will?

If a person has property in India, he is concerned about what taxes he will have to pay to inherit the property. A question that often arises in the mind of a person is whether a foreigner can inherit property in India or not. This blog will deal with the same.

There are various kinds of taxes including Inheritance tax. Inheritance tax is a state tax that is to be paid by the beneficiary of the property after the death of their loved ones. 

How Does Succession in India Work?

In India, Succession can take place in two ways:

1. By Will (also called testate succession);
2. By the law (also called intestate succession).

In both ways of succession, inheritance tax need not be paid. 

Testate Succession

A person holding the property can transfer it to whoever they want by simply creating a will. This kind of succession is termed testate succession. In this way, anyone can inherit the property who is named in the will. Inheritance tax need not be paid in such a kind of succession. Will registration must be done to legally enforce the will. 

However, there are three exceptions to this rule. 

1. Sharia (Muslim) Law
2. The Foreign Exchange Management Act

Disqualified nationalities

Shariah Law

Under Sharia Law, there are two main restrictions on who can inherit. 

1. Only a specific share of the estate can be given to the legal line of succession. This is called the reserved portion. 
2. Certain people are excluded from inheritance. They are:
   1. Non-Muslims
   1. Murderers
   1. Unborn children
   1. Children born out of marriage
   1. Step-parents

Foreign Exchange Management Act

This law applies only to Indian citizens who do not reside in India. If the holder of the property is a non-resident citizen or he is neither a resident nor a citizen, then the person inheriting the property must be either a citizen or a resident of India or he would be disqualified. There is no mention of inheritance tax under this act.

Disqualified Nationalities

Unless permission is given by the Reserve Bank of India, Citizens of the following countries are disqualified from inheriting immovable property in India:

• Pakistan
• Bangladesh
• Sri Lanka
• Afghanistan
• China
• Iran
• Nepal
• Bhutan

Intestate Succession

In India, if a person dies without a will, the laws come into force. The application of succession law will depend upon the religious belief of the deceased. The inheritance tax need not be paid even if there is no will. The main laws are the following:

1. Hindu Succession Act
2. Sharia Law
3. Indian Succession Act

How Do I Accept an Inheritance in India?

Before inheriting the property, one must check whether the deceased had any debts and if he had any, it must be paid off in full before succession. Once that is done, the estate is alienated either as set out in the will or according to the applicable law of intestate succession. However, there is no need to pay an inheritance tax in India. 

Transferring Title to Immovable Property

The immovable property can be transferred by transferring the title formally. No inheritance tax is required to be paid in India. To do the same, the following documents are needed:

1. A registered will or, if succession is intestate, a succession certificate issued by the court;
2. The property’s encumbrance certificate; and
3. The property’s khata.

All these documents are required to be submitted to the local municipality to apply for mutation. The mutation is a procedure that changes the record to show that the inheritor is the owner of the property. It can be done by either himself or he may appoint a representative on his behalf. No inheritance tax is required to be paid. 

What Are the Tax Rates and Allowances?

In India, no inheritance tax needs to be paid. However, to inherit the property, income tax, capital gains tax and wealth tax needs to be paid but inheritance tax need not be paid. If the property inherited is immovable, property tax is required to be paid. The rate of taxes differs from state to state and sometimes even from municipality to municipality. 

Income Tax

If the property inherited generates income, it needs to be included in an annual tax return. Income tax is payable at different rates, depending on your level of income and whether a person is a resident or non-resident.

Capital Gains Tax

If a person sells an immovable property that is inherited by him, he is required to pay capital gains tax on the net profit but no inheritance tax. This tax is calculated by subtracting the cost of the property and any expenses from the sales price.

The rate of tax due will be contingent on how long the deceased had the property before the inheritor sold it.

Wealth Tax

If the value of certain assets exceeds INR 3,000,000, the person is liable to pay a 1% wealth tax. Properties liable to wealth tax include jewelry, property, cash above INR 50,000, cars, boats, and aircraft. No inheritance tax is charged on such assets. 

When Inheritance tax is required to be paid?

If a person transfers his inheritance out of India, he may be required to pay inheritance tax and other taxes. Paying of Inheritance tax depends upon the law of a particular Country. The amount of inheritance tax that needs to be paid is also determined by the Country itself. 

Conclusion

Inheritance tax is not required to be paid in India even when there is no will. However, other taxes need to be paid as discussed above. Registration of will makes it legally enforceable in the Court of law. To know more about the registration of a will and taxes, one must take expert legal advice without any delay.