Tax on Inheritance in India: In India, currently there is no inheritance tax. That means if someone passes away and leaves behind property, gold, or any other assets, the people who receive those things don’t have to pay any tax just for inheriting them. But in many other countries, it’s not like that. They charge a tax called inheritance tax or sometimes death tax. That tax is paid by the person who receives the assets.
What is Inheritance Tax?
Inheritance tax is money you may need to pay when you receive property or any kind of valuable item after someone dies. It depends on how much you are getting and how close you were to the person who died. Like, in some countries, if you are a close family member, you pay less or sometimes nothing. But if you’re a distant relative or just a friend, you might have to pay more.
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In India, we don’t have this tax anymore. It was removed long back in 1985. But still, if you inherit something, like a house or land, and you earn money from it, like rent, then you will have to pay income tax on that rent. Even if the inheritance itself is not taxed, the income you get from it later is taxable.
If someone owns a resort and earns rent from it every month. If he passes away and his son gets the resort, then that rent is now counted as the son’s income. He will have to pay tax on that rent. But the actual transfer of the resort from father to son is not taxed in India.
If you sell something you inherited, you will have to pay capital gains tax. This tax is based on how long you or the person before you owned the property. The time the previous owner had it also matters when calculating the tax.
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.
Will the Government Bring Back Inheritance Tax?
There are talks that inheritance tax might come back. One reason is because a small group of people in India hold a large part of the country’s wealth. A recent report said 1% of Indians own about 40% of the total wealth. That’s a huge gap. Countries like Japan already have very high inheritance tax, as much as 55%, reported Cleartax. Some believe bringing this tax back in India might help reduce this inequality.
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But there are big problems with bringing it back too. Many businesses in India are family-run. If this tax comes back, some business owners might move out of India to avoid paying it. Also, people feel it’s not fair to tax assets again after the person who earned them already paid taxes during their lifetime. It’s like double taxing, and that’s a big concern.
What If You Inherit Something?
Even though inheritance isn’t taxed, once you start earning from the inherited assets, you have to pay tax. If it’s a house or land and you sell it later, you’ll need to pay capital gains tax based on how long it was owned. If it’s mutual funds and you’re an NRI, different rules apply depending on your country of residence.
Some new rulings say that NRIs living in certain countries may not have to pay tax on capital gains from Indian mutual funds at all. That’s because of tax agreements between India and those countries.
How You Can Save Tax on Inherited Assets?
There are some smart ways people use to save on taxes after inheriting something. One way is to hold onto assets like property or shares for a long time to get long-term capital gains benefits. This means you pay less tax when you sell. Another method is using indexation, which adjusts your cost based on inflation, and that helps in paying less tax too.
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Also if you plan on to sell big assets, try not to sell everything in the same year. Spread it over different years so that your income doesn’t go too high at once. Agricultural land is also treated differently. If you inherit farmland, there’s no capital gains tax right away. But if you sell it later, then tax will apply depending on how long you held it.
