Managing Inherited Wealth: Tax Considerations for Gifting Assets

5 May 2024

Inheritance and gifting are common practices that often come with various emotional and financial implications, particularly concerning taxation. When navigating these waters, it's crucial to have a clear understanding of the tax laws that govern such transactions to ensure compliance and optimise tax liability.

Inheritance and Taxation

In the realm of inheritance, the tax implications are guided by the Income Tax Act. Specifically, Section 47 of the Act stipulates that the transfer of capital assets through inheritance is not considered a taxable event. This means that if you inherit cash, real estate, or any other form of property, you do not incur any immediate tax liability on such inheritance. The rationale behind this provision is to ease the financial burden on the beneficiary, recognising the transfer as a continuation of ownership rather than a taxable transaction.

Future Tax Obligations

While the initial receipt of an inheritance is not taxable, future transactions involving the inherited assets may be subject to tax. For example, should you decide to sell an inherited property, capital gains tax could apply, calculated based on the asset's sale price minus its cost of acquisition and improvements (adjusted for inflation). This underscores the importance of maintaining accurate records of inherited assets for future tax assessments.

Gifting and Its Tax Nuances

The act of gifting property or cash, especially to family members, is also subject to specific tax rules under Section 56 of the Income Tax Act. Generally, gifts exceeding a value of ₹50,000 within a fiscal year are taxable unless exempted under certain conditions. Notably, gifts to relatives, as defined by the Act, are exempt from tax. This broad definition encompasses close family members, including spouses, siblings, and lineal descendants, ensuring that most family gifts remain outside the tax purview.

For the purpose of the Income Tax Act, “relative” includes: (a) Spouse of the individual; (b) Brother or sister of the individual; (c) Brother or sister of the spouse of the individual; (d) Brother or sister of either of the parents of the individual; (e) Any lineal ascendant or descendant of the individual; (f) Any lineal ascendant or descendant of the spouse of the individual; (g) Spouse of the persons referred to in (b) to (f).

Exemptions and Reporting

When transferring assets to a relative residing overseas (NRI), the transaction remains non-taxable under Indian tax law. However, it's essential to be mindful of the Foreign Exchange Management Act (FEMA) regulations, which may impose limits on the amount that can be transferred internationally.

Despite the non-taxable nature of inheritances and certain gifts, it's prudent to maintain comprehensive records of these transactions. Currently, the Income Tax Return forms do not specifically cater to reporting inherited assets. However, any income generated from these assets, such as rental income from inherited property, must be declared and is subject to taxation.

Conclusion

Navigating the tax implications of inheriting and gifting property and cash necessitates a thorough understanding of the relevant laws and regulations. By familiarising oneself with these provisions, individuals can make informed decisions that not only comply with the law but also optimise their tax positions. It's always advisable to consult with an experienced chartered accountant to tailor advice to your specific circumstances and ensure that your financial actions are legally compliant and tax-efficient.