Inheritance tax is levied on the wealth transferred from a deceased person to their heirs. While many countries impose inheritance tax as a means to redistribute wealth and generate revenue, India abolished its inheritance tax in 1985. However, the topic remains significant due to ongoing discussions about its potential reintroduction and the existing financial obligations that beneficiaries may face.
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In this blog, we’ll explore the concept of inheritance tax, its historical context in India, and the current tax implications for inherited wealth.
Define Inheritance Tax?
Inheritance tax meaning is basically a tax imposed on the transfer of property of an individual to the next generation or their heirs is known as inheritance or estate tax. The tax rate depends on the financial value of inherited property both moveable or non-moveable.
In India, currently the government does not impose any tax on the inherited property. As per the Income Tax Act 1961, any transfer of the property under the will or by inheritance is considered as a gift and is not applicable for any tax.
Tax on the Sale of Inherited Property
By now, you have a clear understanding that India does not have any laws that ask individuals to pay taxes on the inherited property. However, if the legal heir of the deceased decides to sell the property, do they have to pay taxes?
Let’s understand it in detail:
If the property is inherited, the heir becomes the owner of the property. On deciding to sell the property, the Income Tax Department calculates the holding time of the property to determine if it becomes part of long-term capital gain tax or short-term capital gain tax, which indicates that selling an inherited property is entitled to tax payment.
Note*: The holding period is calculated from the day the deceased originally purchased the property. This duration encompasses both the time the deceased held the property and the time it is held by the heir before a potential sale.
| Short- term capital gain | Long term capital gain |
|---|---|
| If any property is inherited up to 2 years from the date of inheritance, any profit made from the sale of this property is short-term capital gain. | If any property is inherited for more than 2 years from the date of inheritance, any profit made from the sale of this property is long -term capital gain. |
| Tax is charged as per the income slab under short-term capital gain | In case of long-term capital gain, tax is charged at a flat rate of 20% for any moveable property. |
For example:
- Mr. Chhabra purchased a property on January 1, 2000 for 1 Crore. He died on 1 January, 2018 and the property passed on to his son.
- His son decided to sell the property on January 1, 2023 at Rs. 1.5 Crore
- Since the holding period of the property is more than 2 years (24 months), the property will be taxed as a long-term capital gain tax.
- Capital Gain = Net Sale – Indexed Cost of Acquisition
- Capital Gain = Rs. 1.5 crore – Rs. 1 crore
- Capital Gain = Rs. 50 lakh
Mr Chhabra’s son has gained 50 Lakhs from the sale of inherited property and this income is taxed at 20% flat rate (LTCG).
Tax on Income from Inheritance
As per Income Tax Department of India, any income generated from an inherited property is applicable for tax.
If an income is generated in form of rent, interest etc, from the heir of a deceased person’s property, this income will be levied by tax.
For example:
- Mr. Bhasin inherits a residential property worth 50 Lakhs from his father after his demise. Mr. Bhasin decides to put the residential property on rent and gains an income of Rs. 60,000 per month from inherited property.
- Now as per the income tax 1961 law, the property worth 50 Lakhs shall not be levied by tax but the income generated by the property (60,000) will be taxable.
Inheritance tax, previously levied in India, was abolished in 1985. Currently, there is no tax on inherited property itself. However, income generated from inherited property, such as rental income, is taxable. Additionally, selling inherited property incurs capital gains tax, depending on the holding period.
Disclaimer: Nothing on this blog constitutes investment advice, performance data or any recommendation that any security, portfolio of securities, investment product, transaction or investment strategy is suitable for any specific person. You should not use this blog to make financial decisions. We highly recommend you seek professional advice from someone who is authorised to provide investment advice.
