Tax on inheritance and gifts in India, governed by the Income Tax Act, 1961, is a critical aspect of wealth transfer for families and individuals. Understanding these tax rules ensures compliance. How are gifts and inheritances taxed, and what are the exemptions? Let’s break it down.
Are Inherited Assets Taxable in India?
India currently has no inheritance tax. However, this wasn’t always the case. The Estate Duty Act, once in force, was abolished in 1985. Therefore, if you inherit property, jewellery, or money from a deceased person, you won’t be liable to pay tax on the receipt. However, capital gains tax may apply when you sell the inherited asset.
The cost of acquisition is treated as the cost incurred by the original owner, and LTCG tax is levied based on that. Also if it starts generating income (like rent, dividends, or capital gains), that income becomes taxable under your name. For example, if you sell a house inherited from your father, tax applies to the gain, not the inheritance itself.
Gifts Are Tax-Free… But With Limits:
Unlike inheritance, gifts can be taxed under certain conditions. According to Section 56(2)(x) of the Income Tax Act, if you receive gifts worth more than ₹50,000 in a financial year, they may be taxable unless they meet certain criteria. However, several exceptions apply:
- Gifts from relatives (spouse, parents, siblings, etc.)
- Gifts received on marriage
- Inheritances through will or succession
- Gifts from local authorities or charitable institutions
Gifts in kind—like immovable property or jewellery—are taxed based on stamp duty value or fair market price, whichever is higher. If the value exceeds the limit and none of these conditions apply, the gift amount is treated as “Income from Other Sources” and taxed as per your income slab.
Gifting and Inheritance in Business or Estate Planning:
Gifting is commonly used for estate planning or business succession, especially in Indian families. However, tax authorities monitor large transactions under the Benami Transactions Act and anti-money laundering regulations. When gifting shares or business stakes, ensure the documentation is proper.
A gift deed and recipient’s PAN may be required. For business owners, inheritance or gifting of business assets can be tax-neutral, but any subsequent income (like profits or gains from sale) will be taxed.
Failing to do so could trigger notices under Section 143(1) or scrutiny under Section 147 of the Income Tax Act. Moreover, you must route large cash gifts or inheritance above ₹2 lakh through bank transfers to comply with the RBI’s anti-money laundering rules.
Legal Compliance and Requirements:
It’s essential to document gifts or inheritances clearly, especially during income tax returns (ITR) filing. You may need to:
- Declare gifts above ₹50,000 under “Income from Other Sources”
- Report capital gains, if you sell inherited property
- Maintain a gift deed or will copy for tax queries
According to the Central Board of Direct Taxes (CBDT), non-reporting or misreporting can lead to penalties up to 200% of the tax evaded (CBDT Circular No. 9/2020). You can also consult the Income Tax Department’s official FAQ page to stay updated.
Conclusion:
In conclusion, tax on inheritance and gifts in India offers significant exemptions but requires careful reporting to avoid penalties. While there is no direct tax on inheritance and gifts in India, several rules apply. Understanding these nuances can help you stay compliant and optimize your financial planning. Ready to manage your wealth transfers? Explore more tax insights now!
– Ketaki Dandekar (Team Arthology)
Read more about Tax on inheritance and gifts here – https://www.taxmann.com/gifts-and-inheritances