Inheritance tax refers to a levy charged on individuals who receive money, property, or other assets from a deceased person. These inheritances may be acquired through a will, succession, nomination, or joint ownership. Although India officially abolished inheritance tax in 1985, certain tax implications still remain. Beneficiaries are required to pay income tax on any earnings generated from inherited assets and may also be liable for capital gains tax when those assets are sold. Moreover, specific tax provisions apply to inherited mutual funds and assets transferred to or by Non-Resident Indians (NRIs). This article offers a detailed explanation of how inheritance-related taxation works and the scenarios where tax obligations may arise.
What is Inheritance Tax?
Inheritance tax is a levy imposed on individuals who receive money, property, or other assets from a deceased person. It applies to various types of inherited assets, including ancestral property, mutual funds, gold, and other movable or immovable items—whether passed on through a Will or succession. Unlike estate tax, which is levied on the deceased’s estate, inheritance tax is paid by the beneficiary. Since inheritance tax laws and rates differ across countries, it is important for heirs to understand their tax responsibilities when acquiring inherited wealth
Inheritance Tax in India – A Brief Overview
India once had an inheritance tax, known as estate duty, which was introduced under the Estate Duty Act of 1953. It applied to the transfer of assets after a person’s death, with estates valued over ₹20 lakh taxed at rates as high as 85%. However, due to low revenue collection (only ₹20 crore in 1984–85, or 0.4% of total direct taxes), complex procedures, and frequent legal disputes, the estate duty was abolished in March 1985.
Currently, India does not impose an inheritance tax, but certain tax implications still apply. For example:
Income from inherited assets (such as rent, interest, or dividends) is taxable in the hands of the beneficiary.
Capital gains tax may apply if inherited assets like property or shares are later sold, with the gain calculated based on the original owner’s purchase cost and holding period.
Understanding these rules is essential for effective inheritance tax planning in India, helping beneficiaries stay compliant while managing inherited wealth efficiently
Types of Inheritance in India
While India does not impose an inheritance tax on property or assets received, it is important to declare inherited assets when filing your annual income tax return. Inherited property or assets can come through different methods such as wills, nominations, or joint ownership. Here’s a look at the main types of inheritance in India:
Will of Succession
This occurs when a person creates a legally valid will specifying the heirs who will receive their property and assets after death. The will must be duly signed by the testator (the person making the will). The Indian Succession Act governs these wills to ensure the deceased’s wishes are respected and executed accordingly.Inheritance by Nomination
Nomination involves naming a nominee for specific assets like bank accounts, mutual funds, insurance policies, or shares. While the nominee has the right to claim these assets upon the owner’s death, nomination does not transfer absolute ownership but acts as a legal claim until the asset is transferred to the rightful heir. This method has gained greater legal importance recently.Inheritance by Joint Ownership
Under joint ownership, multiple individuals—often family members—hold legal ownership of an asset or property together. When one joint owner dies, their share automatically passes to the surviving co-owners. The rules for joint ownership inheritance vary depending on the asset type, including real estate, bank accounts, or investments.There are three main types of joint ownership:
Tenants in Common: Each owner holds a distinct share of the property, which can be unequal. Upon a co-owner’s death, their share passes to their legal heirs rather than the other joint owners.
Joint Tenancy: All owners have equal shares and interests. When one owner dies, their share is automatically inherited by the surviving owners.
Tenancy by Entirety: This form typically applies to married couples, where neither spouse can sell or transfer the property without the other’s consent. Ownership ends only by death, divorce, or mutual agreement
How is Inheritance Tax Calculated?
Inheritance tax calculations vary depending on the country’s tax laws. While India does not impose inheritance tax, many other countries do levy taxes on inherited assets, including property and wealth.
Here’s a general step-by-step method to calculate inheritance tax in countries where it applies:
Step 1: Calculate the Gross Value of Inherited Assets
Assess the total market value of all inherited items—this includes real estate, investments, vehicles, jewellery, and personal belongings.
Step 2: Subtract Debts and Liabilities
Deduct any outstanding debts, loans, or liabilities attached to the estate to arrive at the net estate value.
Step 3: Apply Exemptions or Deductions
Check for applicable exemptions or deductions (such as a tax-free threshold). These vary by jurisdiction and relationship with the deceased.
Step 4: Determine the Taxable Value
Once deductions and exemptions are applied, calculate the final taxable portion of the inheritance.
Step 5: Apply the Tax Rate
Use the relevant tax rate based on the location and heir classification (spouse, child, etc.) to determine the total inheritance tax owed.
Taxation on Inherited Assets in India
1. Income Tax on Inherited Property
Receiving inherited property doesn’t trigger income tax. However, any income earned from the inherited asset, like rent, must be reported in your income tax return and is taxed as per your applicable slab rate.
2. Capital Gains Tax on Sale of Inherited Property
When you sell inherited property, capital gains tax applies:
Short-Term Capital Gains (STCG): If sold within 2 years of inheritance, gains are taxed according to your income tax slab.
Long-Term Capital Gains (LTCG): If held for more than 2 years, LTCG is taxed at 20% with indexation benefits.
It is recommended to consult a tax expert before selling inherited assets.
Taxation on Specific Inherited Assets
a. Immovable Property (e.g., land, house)
No tax when inherited.
Capital gains tax applies upon sale.
Property tax must be paid annually.
Rental income, if applicable, must be declared and taxed.
b. Movable Assets (e.g., bank accounts, lockers, vehicles)
No inheritance tax applies.
Legal formalities like updating ownership at banks or the RTO are required.
No tax liability arises at the time of transfer.
Taxation on Sale of Inherited Assets
Inheritance itself is tax-free, but capital gains tax applies when the asset is sold.
Income generated from the inherited asset (e.g., rent, dividends) must be declared and taxed annually.
Inherited Mutual Funds in India
No tax on inheritance of mutual funds.
Capital gains tax applies upon redemption or sale:
STCG: Taxed as per your income slab (if held < 1 year).
LTCG: Taxed at 10% (without indexation) if gains exceed ₹1 lakh.
Tax Implications for NRIs Selling Inherited Property in India
Inheritance is tax-free, but selling the property attracts capital gains tax:
LTCG if the property was held for more than 2 years from the original owner’s acquisition date.
STCG if sold within 2 years.
NRIs must also comply with TDS provisions and may claim applicable Double Taxation Avoidance Agreement (DTAA) benefits.
About the Author
Priya
Priya is a seasoned content writer with expertise in business registration, taxation, trademark laws, and corporate compliance. His well-researched articles simplify complex legal topics, offering practical insights that help businesses confidently manage regulatory and operational hurdles
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