Inheritance Tax in India: Definition, Exemptions & Key Insights

If you’ve recently inherited a property or asset, you might wonder: Do I have to pay inheritance tax in India? The good news? India does not impose a direct inheritance tax. But hold on, and there’s more to the story. While assets received are not taxed, should you choose to sell the property later on, you may have to pay capital gains tax on inherited property.

With this in mind, how do all laws concerning taxation work for you? What about different types of assets, such as movable and immovable assets? Let's untangle all of it step by step.

What is Inheritance Tax in India?

As assets are transferred to beneficiaries after the demise of a certain individual, inheritance tax acts as a tax one pays for these assets. Many nations have a system in which they progressively tax the assets passed down from a deceased individual to their heirs for governmental purposes. This means that estates of higher value are taxed at a higher rate. However, when it comes to inheritance tax in India, there is a significant difference—India does not currently impose any direct inheritance tax on property, cash, or other assets received from a deceased family member.

Not everything is as simple as it seems, though. While you do not have to pay tax on inherited property in India, selling an inherited property does open up avenues for capital gains tax.

Taxation on Inherited Assets in India

Even though there’s no inheritance tax meaning you don’t pay taxes just for inheriting assets, different rules apply when you sell them. Let's evaluate how taxes differ on several assets:

As you can see, tax on ancestral property or movable assets applies only when you sell them.

Capital Gains on Inherited Property: How It Works

When you acquire property in India, there is no taxation on the system at the time of acquiring it. However, taxation is effective once the inherited property is sold. This is when the capital gains tax on inherited property in India kicks in. The tax is based on the profit from the sale, which is simply the difference between the selling price and the indexed acquisition cost.

Holding Period and Type of Capital Gains Tax

The capital gains tax payable is determined based on the duration the property is held before selling. The categorization is as follows:

• Short-Term Capital Gains Tax (STCG): If you sell the inherited property within three years, the gains will be classified as short-term capital gains. Those gains are taxed based on the relevant income tax slab rate.
• Long Term Capital Gains Tax (LTCG): Selling the inherited property after three years qualifies as long term capital gain, which is taxed at 20%, with indexation benefits.

Indexed Cost of Acquisition: How It Reduces Tax Liability

When calculating capital gains, the index of acquisition expense is very important in reducing the taxable amount. Given that an inherited property is likely to have been purchased long ago, its value would be much lower than its current market price. Rather than taxing the difference between the selling and purchase prices, the purchase price is bereft of the cost inflation index (CII).

How to Save Tax on Inherited Property?

1. Reinvest Under Section 54

   Under Section 54, you can avoid capital gains tax if you reinvest the proceeds from the sale into another residential property. The conditions are:
   • The new property must be bought within 2 years or constructed within 3 years from the date of sale.
   • You need to hold the new property for a minimum of three years.
   • The exemption applies only for long term capital gains (LTCG) and not for short term gains.

2. Invest in Capital Gains Bonds (Section 54EC)

   If you do not want to reinvest in real estate again, you can invest the capital gains amount in specified bonds under section 54EC and claim a tax exemption.
   • The bonds issued by NHAI (National Highways Authority of India) and REC (Rural Electrification Corporation) are eligible.
   • The maximum investment limit is 50 lakh.
   • Investment has to be made within six months of the date of sale.
   • The bonds come with a five-year lock-in period.

3. Use the Capital Gains Account Scheme (CGAS)

   Should you need some time before reinvesting in a property, you can deposit the gains in a Capital gains Account Scheme (CGAS) that some banks offer. This allows claiming a temporary exemption while planning for reinvestment, but if the money is not utilized in three years, it goes under capital gains tax.Example
   

   Particulars	Amount (₹)
   Sale Price of Property	80,00,000
   Purchase Price (Original)	10,00,000
   Cost Inflation Index (CII)at Purchase	200
   Cost Inflation Index (CII) at Sale	350
   Indexed Cost of Acquisition	(10,00,000 × 350) ÷ 200 =17,50,000
   Long-Term Capital Gains(LTCG)	80,00,000 – 17,50,000 =62,50,000
   LTCG Tax (20%)	12,50,000

Nonetheless, if the seller does reinvest in a new property or invests in 54EC bonds, this tax burden can be relieved.

Inheritance Tax on Property - Different Ownership Types

1. Will-Based Inheritance

   A legally drafted Will is the most accessible and safest means of distributing property and other assets. Drafting a Will guarantees that the distribution of assets will go to the intended heirs after the demise.

2. Nomination-Based Inheritance

   Nomination based inheritance is employed for financial assets owned under a bank account, life insurance policies, mutual fund accounts, and shares. In this case, there is no necessity to go through probate processes.
   How It Works:
   • The asset holder designates a nominee who automatically assumes ownership after the death of the asset holder.
   • The process helps achieve an effective ownership transfer without any legal obstacles.
   • However, a nominee is merely an administrator to the asset but not an heir in her rights unless a Will is executed.
   For instance, a friend can be nominated to a bank account together with a child as a beneficiary. After death, the child becomes the legal heir and can claim the asset after providing evidence to the nominee bank.

3. Joint Ownership-Based Inheritance

   In the case of jointly held property, the inheritance depends on the ownership type.
   Types of Joint Ownership:
   

   Ownership Type	Description	Inheritance Implication
   Tenants in Common	Each owner has a particular share of the property.	The deceased’s share is passed to their heirsper the will or succession law.
   Joint Tenancy	All owners have similarrights to the entire property.	Upon one owner’s death, the surviving owners automatically inherit the deceased’s share.
   Tenancy by Entirety	Reserved for married couples. Similar to joint tenancy but offers added legal protection.	The surviving spouse automatically becomes the full owner.

   Example:
   When two siblings own a property as tenants in common, both siblings have distinct portions. Upon death, such a sibling’s legal heirs will succeed to their portion, not through the other sibling automatically.
   In joint property ownership tenancy, if two business partners own a property, full ownership is transferred to the other partner in the business when one partner dies.

Income Tax Implications on Inheritance in India

Even though there is no direct taxation through inheritance tax in India, there are indirect taxes for inherited properties based on their use or transfer.

1. Rental Income from Inherited Property

   An inherited rented property has the rent income tagged as “Income from House Property”.
   Tax Treatment:
   • Standard Deduction: 30% of the rent income is exempt from taxation.
   • Home Loan Interest Deduction: The interest paid on the home loan on the inherited property can be claimed as a deduction.
   • Tax Deductions: The net rental income after expenses is added to total income and becomes taxable according to the income tax brackets.
   For example, if you earn ₹6 lakhs from rentals in a year, then ₹1.8 laps (30%) would be deducted, leaving you with a taxable of ₹4.2 lakhs which is taxed based on your slab.

2. Selling Inherited Assets

   When you sell inherited properties, you pay capital gains tax depending on the holding period.
   • Short-Term Capital Gains Tax (STCG): If sold within three years of inheritance, gains are taxed at your income tax slab rate.
   • Long-Term Capital Gains Tax (LTCG): If sold after three years, Long Term Capital Gains is taxed at 20% with indexation benefits.
   Example Calculation:
   

   Particulars	Amount (₹)
   Selling Price	90,00,000
   Original Purchase Price	15,00,000
   Cost Inflation Index (CII)at Purchase	200
   Cost Inflation Index (CII) at Sale	350
   Indexed Cost of Acquisition	(15,00,000 × 350) ÷ 200 = 26,25,000
   Taxable Long-Term Capital Gain	90,00,000 - 26,25,000 = 63,75,000
   LTCG Tax at 20%	12,75,000

3. Gift Tax on Inherited Property

   There is no tax on inheritance, but gifting an inherited asset to someone outside of the family may attract tax.
   When Gift Tax Applies:
   • No tax applies if the inherited property is gifted to a spouse, children, parents or siblings.
   • If given as a gift to friends, family members or people who are not relatives, the person paying the gift tax must do so if the asset value exceeds ₹50,000.
   • If the property yields profits (such as rent), then under the clubbing provisions, the asset's original owner is liable to pay taxes.

How to Minimize Tax on Inherited Assets?

• Plan for Capital Gains Exemptions: Reinvest sale proceeds in another property under Section 54.
• Purchase Capital Gain Bonds: Tax payment will be avoided if Rural Electrification Corporation (REC) Bonds or National Highway Authority of India (NHAI) Bonds are bought under Section 54EC.
• Use the Income Tax Calculator: Figure out the amount of taxes you have to craft carefully with an inherited estate. We suggest using the PNB MetLife income tax calculator to simplify the process.

Types of Taxes in India & Their Connection to Inheritance

Regarding the lack of inheritance tax in India, there are still other direct and indirect tax laws that you will need to follow after the wealth has been passed on.

1. Direct Taxes

   Income Tax: Comes from rent revenue, interest gained from fixed FDs, or profit obtained through the sale of assets.

2. Indirect Taxes

   GST: There is no direct relation to assets inherited. On the other hand, if you have an inherited commercial property that is then rented out, then GST on the rental revenue comes into play.

Knowledge about different types of taxes in India is essential in ensuring that you remain compliant while reducing your tax burden.

Conclusion

We trust that this guide answers the question what is the inheritance tax in India and its impact on tax levies on inherited property in India. To summarize:

• Although there is no inheritance tax in India, a capital gains tax is applicable when selling inherited property.
• Rental income from inherited property falls under taxation.
• Tax savings opportunities are available for reinvestments under section 54 or capital gains bonds.

Would you like to calculate your estimated tax liability on an inherited property? Try the PNB MetLife Income Tax Calculator today!

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