Receiving an inheritance, whether expected or not, often brings a sense of warmth, knowing that someone valued and cared for you enough to leave something behind. However, this pleasant feeling can sometimes be overshadowed by the realization that you might have to deal with tax implications on what you’ve received. So, does one actually have to pay inheritance tax in India? Here’s a comprehensive guide to understanding the potential taxation implications that come with receiving an inheritance.

What is inheritance tax?

Inheritance tax is a levy imposed on individuals who inherit property or assets from a deceased ancestor. In many countries, when a legal heir receives assets from the estate of a deceased individual, they are required to pay inheritance tax on the value of those assets.

Is it leviable in India?

At present, India does not impose any tax on legal heirs, nominees, or beneficiaries when they inherit movable or immovable assets. Although these inherited assets could be viewed as gifts since they are received without any consideration, no gift tax is levied. This exemption is due to the provisions of the Income-tax Act, 1961, which specifically excludes assets received through inheritance or a will from the scope of gifts.

Therefore, these are not classified as income, and consequently, no tax liability is incurred on the assets received through inheritance. However, tax regulations do come into play regarding any income generated from these inherited assets or property. For example, if an individual inherits a house, they are exempt from paying inheritance tax on it, but they will be subject to applicable taxes if they decide to rent out the house or sell it.

Likewise, if you inherit bank deposits or assets that generate interest, this additional income will be considered part of your overall income and taxed accordingly. Therefore, any income generated by the inherited property or asset will be subject to taxation.

Moreover, upon becoming the owner of an inherited property or asset, you have the option to sell it in the future. In such a scenario, any profits or losses resulting from the sale of this property will be attributed to you. If there are gains, you will be required to pay capital gains tax on them.

An Example

Let us evaluate the taxability with the help of an example.

You inherited ₹50 lakh in cash and three house properties. After that, you decided to gift ₹25 lakh in cash and one house to your sister’s daughter residing abroad. Now, the question arises: do you need to pay income tax on the entire inheritance, or only on the remaining amount after allocating assets to your niece? Moreover, should you declare this transfer in your income tax return (ITR)?

As per section 47 of the Income Tax Act, the transfer of capital assets through inheritance is not considered a taxable transfer. Hence, receiving ₹50 lakh and three-house properties through inheritance does not attract any tax liability at this point. Any tax obligation would only arise upon the eventual sale of the house property in the future. It’s worth noting that there’s currently no provision in the income tax return for declaring inherited property, thus no additional disclosure is necessary for these inherited assets.

Under Section 56 of the Income Tax Act, any monetary gift, immovable, or movable property received by an individual becomes taxable if the aggregate sum of money received during the year exceeds ₹50,000. Nevertheless, there are specific exemptions to this regulation, notably gifts received from relatives.

For the purpose of the Income Tax Act, “relative” includes:

(a) Spouse of the individual;

(b) Brother or sister of the individual;

(c) Brother or sister of the spouse of the individual;

(d) Brother or sister of either of the parents of the individual;

(e) Any lineal ascendant or descendant of the individual;

(f) Any lineal ascendant or descendant of the spouse of the individual;

(g) Spouse of the persons referred to in (b) to (f).

In line with this, the transfer of cash and house property to your nephew should also be non-taxable. Nonetheless, the repatriation limits for the gift will be subject to the regulations outlined in the Foreign Exchange Management Act (FEMA), which dictate the amount he can receive within the prescribed limits.

The history of inheritance tax

In 1953, inheritance tax was introduced under the Estate Duty Act, but it was abolished in 1985 during the tenure of the Rajiv Gandhi-led government. The decision to abolish it was driven by concerns over the high cost of collections, tax avoidance, and instances of double taxation. Additionally, India previously had a gift tax, which was abolished in 1998, and a wealth tax, which was abolished in 2015. In the FY16 Budget, the government announced the abolition of the wealth tax and its replacement with a surcharge targeting the super-rich. Currently, a 10% surcharge is imposed on personal income exceeding Rs 50 lakh, with the maximum surcharge rate reaching 25% under the new tax regime for individuals whose annual income exceeds Rs 2 crore. In 2019, there were internal discussions within the government regarding the potential reintroduction of the inheritance tax. Although it was considered during the Budget formulation process, the idea did not come to fruition.

In conclusion, in India, properties inherited through a will are exempt from stamp duty at the time of inheritance. However, stamp duty may apply when the inherited property is later sold or transferred. 

Key Points to be noted:

- No Stamp Duty for Inheritance: Properties inherited through a will won't attract stamp duty, as the transfer is considered a succession, not a sale.
- Stamp Duty Applies Later: If the inheritor sells or transfers the property, stamp duty will apply based on the transaction type and state laws.
- Registration Fees: While registering a will isn't mandatory, it may involve a nominal fee, which is different from stamp duty.
- State Laws Vary: Stamp duty laws differ across states, and some may have minimal registration charges or fees for transferring property titles post-inheritance.

State-wise Stamp Duty Rates:

Some states offer concessional rates for property transfers between family members:
- Rajasthan: 6% for males, 5% for females (ST/BPL), and 4% for females (other than SC/ST/BPL)
- Maharashtra: 6% for males, 5% for females
- Karnataka: 5% (above ₹45 lakh), 3% (₹21-45 lakh), and 2% (less than ₹20 lakh)

Additional Costs:

- Registration Charges: Typically range from 1% to 2% of the property's market value
- Miscellaneous Charges: May include documentation, notary fees, and legal consultancy fees

Conclusion:

India doesn't levy inheritance tax currently, so inheritors don't need to pay tax on the property received through a will. This allows a relief to beneficiaries as they receive their assets or property without the burden of additional tax obligations. However, this may change if laws are amended.

It's always best to consult a legal professional to understand specific registration and tax implications in your state.