Inheritance Tax on Property

India does not currently impose inheritance tax. You might be wondering why it should be brought up. Well, with some of the recent discussions about its potential reappearance, the topic has returned. Let’s take a closer look at the inheritance tax notion in this essay. Due to its poor execution and exorbitant rates—which might exceed 85% for bigger estates—the inheritance tax, commonly referred to as estate duty, was eliminated in 1985. Consequently, recipients do not have to pay taxes when they inherit property.

What is Inheritance Tax?

It is customary for a person’s assets and property, even ancestral ones, to be transferred to their wards, children or grandchildren upon their death. The deceased person’s estate is subject to inheritance tax, often known as estate duty or death tax. It is gathered from the estate in accordance with intestate succession laws or a will before the estate is distributed. It may also be retrieved from the beneficiaries who inherit the deceased’s property. 

In many nations, inheriting any kind of belongings or wealth from your parents, grandparents or other family members or friends entails paying inheritance tax. However, the idea of taxing inheritance does not currently exist in India.

Tax on Sale of Ancestral Property

The owner frequently receives money from the inherited property in the form of rent, interest, etc. The revenue is given to the heir when they take ownership. The newly acquired owner must therefore report this income and make the appropriate tax payments.

For instance, a commercial complex owned by Mr. Atharva is available for rent. For the construction of the building, he had to pay Rs. 60 lakhs. He receives Rs. 70,000 a month in rent from the building. When Atharva passes away, his property is given to Santosh, his son, who is his legal heir. In this case, the transfer will not be taxable because it is made under a will. However, Santosh will be responsible for paying taxes on the Rs. 70,000 in rent that he would now get.

Tax on Subsequent Sale of Ancestral Property

When you acquire a property, you are the legal owner and have the option to sell it later. In this manner, as the legitimate heir, you will also get the capital gain or loss.

Additionally, whether capital gains are subject to long-term or short-term capital gains tax depends on the holding period—the time frame during which you and the dead possessed the property.

When an inherited property is sold, the following capital gains are carried out:

1. Gains from the property will be referred to as Long-Term Capital Gains (LTCG) and subject to 20% indexation tax if they are kept for more than 24 months after the date of acquisition. Nonetheless, the Budget 2024 lowers taxes.

2. Gains from the property are referred to as short-term capital gains (STCG) and are subject to the taxpayer’s applicable slab rate of taxation if they are retained for less than 24 months after the date of acquisition.

For instance, when Mr. Ashish’s father passed away in 2019, he inherited his property. On February 22, 1997, Mr. Ashish’s father paid Rs. 40,000 for the property. On November 12, 2023, it sold for Rs. 5,00,000. The capital gain will be categorized as long-term as the property has already been held for longer than twenty-four months (the holding period also includes the father’s holding period). As a result, the legal heir can benefit from indexation when calculating capital gains and must pay long-term capital gain tax at the rate of 20% (plus any applicable surcharge and taxes).

How to Save the Capital Gains On Inherited Property?

Section 54EC Bonds 

Within six months of selling the inherited property, invest the sale profits in bonds issued by the National Highway Authority of India (NHAI), Indian Railways Finance Corporation Limited (IRFC), Rural Electrification Corporation Ltd (RECL) and Power Finance Corporation Ltd (PFC). However, in a given fiscal year, the highest acceptable investment amount excluded from capital gains tax is Rs. 50 lakh.

Section 54 Exemption

Using the selling proceeds to build a new home within three years or to buy a new home before the sale or within two years of the inherited property’s sale date. Up to two residential properties may be purchased by a taxpayer and up to Rs. 2 crore in LTCG exemptions are permitted. Additionally, according to the Finance Act of 2023, a claim for exemption from FY 2023–2024 must not exceed an overall threshold of Rs 10 Cr.

Calculation of Inheritance Tax

The first step in calculating inheritance tax is to ascertain the total market worth of all assets that the deceased possessed at the time of their passing. All assets should be included in this evaluation, including real estate, investment holdings (stocks, bonds, mutual funds, etc.), automobiles, current bank balances, and personal property (jewellery, artwork, and other valuables).

Liabilities are deducted from assets to determine the estate’s net value, which is then subject to the current inheritance tax rate. In certain instances, the rate may be progressive depending on the valuation of the estate, or thresholds as well as allowances might exempt a portion of the estate from taxation. 

Additionally, the deceased may legitimately minimize the inheritance tax burden by using tax planning techniques like gifting or establishing trusts, which should also be taken into account. 

Illustration

Let’s say Mr. Ramesh recently inherited a property worth Rs. 10 crores upon his father’s death. Assuming inheritance tax of 10% on any property inherited over and above Rs. 5 crores, then inheritance tax will be applicable in this case as under:

Taxable Inheritance amount after exemption – 5 Crores

Rate of Inheritance tax – 10%

Tax payable on Inheritance by Mr. Ramesh = 10% of 5 crores = Rs. 50 lacs

Methods of Inheritance Tax

• Will of succession

This is an old and traditional way of inheritance. Will of succession is a document in which the deceased person has pre-declared the lawful owner of his/her assets.

• Inheritance by nomination

A person can declare a person of his/her choice as the nominee. The nominee then becomes the lawful owner of an asset and the benefit it generates.

• Inheritance by joint ownership

If any asset lies under the joint ownership of two or more people, the survivor(s) get to manage the asset post death of the other owner(s).

Inheritance by Joint Ownership

If there is an existence of any asset or property under joint ownership of people, involving two or more individuals, the surviving person possesses complete control of the deceased person’s assets. 

Joint ownership of the inherited property takes place in the following ways:

• Tenants in Common

This is when two or more people are involved in purchasing a property but do not mention shares of each other. If one of them dies, his or her assets are then passed on to the legal heir.

• Joint Tenancy

This is when two or more persons are owners of the property and each of them has equal shares with the same rate of interest and under the same deed. When one of the joint tenants dies, the other surviving tenant avails the share.

• Tenancy by Entirety

This kind of ownership takes place between spouses. None of them can sell off the property without the consent of the other spouse. Thus, it is only possible to end ownership only through death, divorce or mutual agreement between spouses.

Frequently Asked Questions on Inheritance Tax on Property

Q1. How does India tax inheritance? 

Ans1.India does not impose an inheritance tax. Assets are obtained without payment and are transferred to the lawful heirs. 

Q2. Does India allow NRIs to inherit property? 

Ans2.In India, NRIs are able to inherit property. There aren’t any inheritance taxes, though. 

Q3. Is life insurance that has been inherited taxable? 

Ans3.Any money received from a life insurance policy due to the policyholder’s unexpected passing is exempt from taxes. The nominee is therefore entitled to the necessary sum assured in this situation. 

Q4. Are shares that are inherited subject to capital gains tax? 

 Ans4.If the individual who inherited the assets chooses to sell them, capital gains tax will be due. 

Q5. What is inheritance tax and does India impose it?

Ans5.Inheritance tax, also known as estate duty or death tax, is levied on the estate of a deceased person before being transferred to beneficiaries. India does not currently impose inheritance tax; assets are passed on to legal heirs without any tax liability. 

Q6. Are NRIs allowed to inherit property in India?

Ans6. Yes, NRIs can inherit property in India. There are no restrictions on inheritance for NRIs and they do not have to pay inheritance tax since it is not applicable in India.

Q7.  How is tax calculated on the sale of ancestral property in India?

Ans7. When ancestral property is sold, the tax liability depends on the holding period. If the property is held for more than 24 months, it qualifies as a long-term capital gain (LTCG) and is taxed at 20% after indexation benefits. If sold within 24 months, it is categorized as short-term capital gains (STCG) and taxed as per the applicable income tax slab.

 Q8. How can I save capital gains tax on inherited property in India?

Ans8.  You can save capital gains tax on inherited property by:

• Investing in Section 54EC Bonds within six months of the sale.
• Utilizing Section 54 exemptions by purchasing or constructing a residential property within the specified timeframes.

Q9. Are inherited life insurance payouts taxable in India?

Ans9. No, inherited life insurance payouts are not taxable in India. Any amount received from a life insurance policy due to the policyholder’s demise is fully exempt from taxes under Indian law.

 Q10. Do I have to pay capital gains tax on inherited shares?

Ans10. No tax is levied when you inherit shares. However, if you sell the inherited shares, you are liable to pay capital gains tax based on the holding period of the shares (including the original owner’s holding period).