Taxation of property received through inheritance

[ecis2016.org] A person who inherits a property, has to pay tax on the income earned from the property. We look at when this tax liability arises, in case of inheritance through a will and in case of intestate inheritance

A person is taxed on the income earned by him. This income may be active income, in the form of salaries or income from business. It may also be passive income, like capital gains or interest or rental income from house property. Rental income is taxed, on the basis of ownership of the property. So, unless you have become an owner of a house property, the liability to pay tax does not arise.

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What is an ancestral property?

An ancestral property is that which a person inherits from any of three immediate male ancestors, including one’s father, grandfather and great grandfather. The Income-Tax Act, 1961, does  not recognise the change of property as inheritance if you have inherited a property from any person apart from these three above-mentioned relations.

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In case of inheritance, the tax liability will arise at the point of time, when you become an owner of the property.

You can inherit a property in two ways:

• You can inherit it under a valid will, whereby, a person bequeaths an immovable property.
• In case no will is prepared by the deceased, the person is said to have died intestate. In case the person has died intestate, all his properties including immovable properties, are inherited by his relative.

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The tax on inheritance, called ‘Estate Duty’ was abolished in 1985, and, therefore, there is no tax on inheritance in India. However, the person who inherits a property, has to pay regular tax on the income earned on the property so inherited, as the owner of the property.

However, the main tax liability on inherited property will arise in the form of capital gains tax, when the receiver of the property decides to sell it.

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Taxation of property inherited under a will

You can bequeath all your assets the way you want, by way of a will. However, a Muslim cannot bequeath more than one-thirds of his assets under a will. A Muslim can bequeath his entire assets, provided he has the consent of all his heirs. Under a will, when the person making the will (called a testator) dies, the management of all his assets vest with the executor/s appointed under the will. So, when a person who has made a will dies during the year, his income from immovable property will be taxed in different hands, for the year.

The legal heir/representative of the deceased is/are required to file income tax returns for the period, from beginning of the year till the date of death, and include the income from the property in the returns filed, as legal representatives of the deceased. From the date of death and till the distribution of the assets, the executors of the will are responsible for filing the income tax returns. The income for this period shall be included in the return to be filed by the executors, in the status of ‘Estate of late (the deceased)’.

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If the distribution of the assets happens in the same year as the death of the person, then, the person who gets the property from the execution of the will, has to include the income from the property in his/her personal income tax return from the date of acquiring it, till the end of the year. This may even be for a single day.

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So, the number of persons who will have to pay tax, with respect to property acquired under a will, depends on the time taken by the executors to actually distribute the property.

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Taxation of property under intestate inheritance

In case the deceased has not prepared a will, or if the property in question has not been dealt with under the will, the property passes on to the legal heirs, immediately on the death of the person.

So, the heir/s who are entitled to the inheritance, become the owner/s of the property, on the day of death of the person, without there being any need for anything to be done by anyone. The income from property, from April 1 of the year, till the day of death, will be taxed in the hands of the legal representative of the deceased. For the rest of the period, it will be taxable in the hands of the person who has inherited the property.

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In case of a let-out property, if the same is inherited by more than one heirs, the heirs shall inherit the property as joint owners. Each one of them shall be treated as owner of the part inherited and shall be taxed individually, for his share in the property, rather than as joint owners of the property and being taxed as ‘association of persons’ with respect to such property.

(The author is a tax and investment expert, with 35 years’ experience)

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