What is inheritance tax

The laws of taxation applicable on inherited properties are unique and do not resemble the other such taxation laws. Quite a many people in the country are not aware of how the taxation on the inherited property differs from that of others.

Inheritance tax in the Indian context

Inheritance Tax is what is payable to the government as tax on the properties that are inherited by legal heirs. As per the social practices, it is understood that one’s assets and property pass on to their legal heirs like children and grandchildren after the subjects pass away. In some countries, the legal heirs inheriting the property need to pay inheritance tax for the properties and assets inherited from their parents or grandparents or other relatives or friends. However, in India there is no law that levies a tax on the inherited property. With effect from 1985, the inheritance tax, also known earlier as estate tax was abolished in India.

The implications of income tax on inherited property

When an individual dies, the properties that the deceased owned will automatically pass on to the legal heirs. This event of transfer can be compared to something like the transfer of an account without expecting any returns. In this way, such a transfer can be deemed as a gift for the purpose of calculating income tax. Nevertheless, as per the provisions of Income Tax Act 1961, transfer of property by virtue of a will or inheritance is not treated like inheritance through a gift. So, the law does not levy a tax on the property an individual receives through inheritance.

Tax on the income generated on the inherited property

In most cases, the inherited property becomes a source of income through rent or interest to the person who has inherited it. When the heir turns as the owner of the property after inheritance, the income ensuing from the inherited property goes to the heir. As the new owner of the property, the heir must now declare the income and pay the taxes relevant.

Tax payable on the subsequent sale of the inherited property

The heir inherits a property and becomes the owner of the property. As the new owner, the heir can choose to sell the property. In this way, the capital gain or loss will be accrued to the legal heir. Now the period of time for which the hew owner held the property will decide if the capital gains will be treated as long term capital gains or short term capital gains for the purpose of taxation.

For example, consider the person X inherited a property from his father who died in the year 2017. X’s father purchased the property in the year 2000. After inheriting the property, X sold it in 2018. In this case, it will be considered that the property was held for a period more than 24 months (including the period when the property was held by X’s father). So, the capital gains will be treated in this case as a long term gain. The legal heir can therefore avail of the benefit of indexation while deciding on the capital gains.