Inheriting property and assets can be a pivotal moment for an individual in their financial journey. Whether it is a family home, real estate, or any other valuable property, it is a warm reminder that you are a loved and important person for someone to leave behind something. What may sour this feeling is the tax implications that may occur once you have received it.
Therefore, it has become crucial to comprehend the tax liabilities of the inherited assets in a bid to efficiently conduct estate planning. Moreover, several people among us have the misconception that estate planning is something to be thought of after retirement. However, one should know that the right time for estate planning is now.
Estate planning: Now is the right time
When family members rely on the income from inherited assets for their survival, development, and prosperity, this becomes much more crucial. Estate planning should be done as early in life as possible to guarantee the financial stability of one’s family in the event of one’s death or an unanticipated disaster or event. It is never too late or too early to do this, and therefore the right time is now. Moreover, one crucial aspect of estate planning is also planning for tax implications.
Inheritance taxes in India
Several countries, such as the USA, UK, Germany, and more, have tax codes related to the inheritance of assets. However, regarding India, let us clear up a misconception that many people have. In our country, we do not have to pay any inheritance taxes, and in fact, the law was abolished in 1985. Therefore, you do not have to worry about the inheritance tax while estate planning. However, the absence of this tax does not mean there are no other tax implications.
Tax implications on inherited assets
Whenever there is a situation of the inheritance of an asset, relevant taxes come into play under the Income Tax Act, 1961. For instance, if a person passes away, their property gets transferred to their legal heirs. Now, there can be scenarios where the bequeathed property opens income streams for the new owners in terms of interest or rent. In such instances, this income may be added to your other income streams and is subject to income tax.
The owner of an inherited property is responsible for paying the tax at the appropriate rate on any capital gains that result from the sale of the property. However, Section 54 of the Income Tax Act provides a prospective exemption in the event that the earnings of the sale are used to purchase a new residence or another property of equivalent or higher worth.
All things considered
A misconception regarding estate planning is that high-net-worth individuals are the only ones who should plan it. However, this is not the case and it is imperative that everyone, regardless of wealth or age, make sure that their family inherits the assets in question and has proper authority over them following the death of the patriarch or asset owner. In order to make the process smoother, one must know about the implied taxes so that they can protect this precious wealth for future generations.
Kapil Rana, Founder of HostBooks
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Updated: 24 Nov 2023, 02:57 PM IST