A Complete Guide to Tax on Inheritance in India

Tax on Inheritance in India: Everything You Need to Know 

There are several tax-related components to take into consideration when inheriting assets from family members. The taxable cost of inherited assets is one of the most common concerns. However, the inheritance tax laws in India are simpler than most people may think. 

In India, wealth or assets passed down through the generations are free from inheritance taxes. Although this could come as a surprise, India abolished its wealth tax in 2015. This means you won't be required to pay taxes just for inheriting property, making it a tax free investments. However, depending on the type of inherited property, you must still be careful of some tax implications so that you can maximise your tax benefit.  

Tax Implications on Inherited Assets 

Even though inheritance tax is not required in India, there are few situations in which inherited assets could be taxable. Let’s take a closer look: 

      1. Immovable Property 

Immovable property, like land or real estate, usually has tax implications related to the sale of the property rather than inheritance. You will be responsible for paying capital gains tax on any rise in the property's value between the time of inheritance and the sale if you inherit it and then sell it. 

The property's fair market value on the day of inheritance is what's referred to as your "cost of acquisition." Let’s take an example to understand it in more depth. 

Example: You inherited a property from your parents in 2022, and the fair market value at the time of inheritance was ₹50 lakhs. Later, you decide to sell the property at the price of ₹70 lakhs.   

• Fair Market Value at inheritance (acquisition cost): ₹50 lakhs 

• Selling price: ₹70 lakhs 

• Capital gain: ₹70 lakhs – ₹50 lakhs = ₹20 lakhs 

The ₹20 lakhs would be subject to either short-term or long-term capital gains taxes, based on the length of time you own the property before selling it. 

      2. Movable Assets 

Gold, jewellery, and cars are examples of moveable assets for which the tax amount is based on the asset sale value. If you sell a moveable item that was inherited, you will be liable for capital gains tax, which is determined by the asset's value at the time of inheritance. 

However, immovable and movable assets differ in one important way: jewels and gold may have estimated values that are subject to dispute if the market value is unclear. It's necessary to have accurate records of their inheritance value to avoid conflicts. 

      3. Other Assets 

Shares, bonds, and inherited bank accounts may also be subject to capital gains tax when sold. The market value on the date of inheritance becomes your acquisition cost, and any rise in value upon sale will be subject to capital gains tax, just like with real estate. 

For example, if you inherited shares worth ₹10 lakh and you sell them for ₹12 lakh, the ₹2 lakh rise in value will be subject to capital gains tax. 

Tips to Minimise Tax on Inherited Assets  

Here are some practical tax saving strategies to reduce your tax burden on inherited wealth: 

• Exploit Long-Term Capital Gains Benefits: You may be eligible for reduced long-term capital gains tax rates if you hold assets, such as real estate or stock, for a longer period. 

• Use the Benefits of Indexation: Indexation helps reduce taxable gains by adjusting the cost of assets such as gold and real estate for inflation and can result in tax benefit. 

• Arrange the Sale Strategically: To limit obligations and maintain a lower tax band, spread out the sale of valuable assets over several financial years. 

• Look into Tax-Free Options: In India, capital gains tax does not apply to inherited agricultural land at the time of inheritance. However, if the land is later sold, capital gains tax will apply based on the holding period. Holding onto agricultural land for farming may provide certain regulatory advantages, but it is important to be aware of tax implications when selling the property. 

Common Mistakes to Avoid 

Typical mistakes while handling inherited assets might result in needless taxes or complicated legal issues and can reduce your tax benefit. Here are a few mistakes to be aware of: 

• Delaying Ownership Transfers: To avoid legal problems, update ownership documents as quickly as possible, such as bank accounts or title deeds. 

• Not Maintaining Appropriate Documentation: To ensure proper tax calculations and tax benefit in the future, keep track of the value of the inherited assets, including valuation reports and receipts. 

• Assuming Inheritance Tax: Many individuals wrongly think that inheritance tax is applicable in India, which causes unnecessary doubt over their tax responsibilities. 

• Ignoring State-Specific Regulations: Additional stamp duty or other regulations for property transactions may exist in some states. Please be careful to review local laws. 

Final Thoughts 

Although there is no inheritance tax in India, handling inherited wealth involves extra caution to prevent unexpected tax obligations. You can protect your inheritance by being aware of the tax benefits for different asset classes and by adopting proactive measures, such as employing indexation and maintaining appropriate documentation. 

When in doubt, seek advice from a financial professional to ensure your assets are protected. Adhere to tax regulations while staying on track with your financial plan.