 "Earn sufficient income from inheritance")
While all of us would like a big inheritance, very few of us actually know how to manage one prudently. Those who inherit a large sum of money are often tempted to make one big purchase, such as a cherished sports car, or take a world tour. But this can make the inheritance disappear as quickly as it arrived.
Most people see inheritance as money that can be spent without a care in the world. But inherited assets can go a long way in taking one nearer to financial independence and, therefore, investors should use such big assets in a way that can enhance financial freedom. Hence, at the very outset you should chalk out an appropriate strategy that will help you preserve your inheritance first.
As a very first step, those who inherit large sums of money must avoid thinking about it for some time at least. Or else you could be tempted to spend it. For the first few months, make plans of how you would like to use that inheritance, which may also include spending such as the much-needed refurbishing of your house, but take time to ponder over such decisions before you execute them.
No tax on inheritance
According to the present Indian income-tax law, no tax is applicable on inheriting property in India. However, tax is applicable when one sells it. For instance, if you sell inherited property, capital-gains tax is applicable on the same. In order to arrive at the amount of the gains, one deducts the cost/expenditure incurred when purchasing/acquiring a property and any cost incurred directly on selling it. If the property was acquired before April 1, 1981, you have the option to consider the original purchase cost or the market value on April 1, 1981. If the property had been purchased three years before, one can avail of the indexation benefit in order to reduce the capital-gains tax on the property. This is similar to how one would have calculated taxes for a self-owned property. When determining whether assets are long term or short term, the holding period of the previous owner is to be considered.
If the inheritor is an NRI, the purchaser of the property is required to hold back the tax amount "Tax at Source". However this can be avoided if either the purchaser of the property makes an application u/s 195 (2) or the seller (the NRI inheritor) submits an application u/s 197. Proceeds from the sale of the property are credited to the NRO A/c, which can be repatriated.
If an individual inherits any financial assets in India, no tax has to be paid on them. However, if these assets lead to generation of income/gains, tax has to be paid accordingly. Such financial assets include mutual funds, shares, debentures, fixed deposits, unlisted shares or even a majority stake in a private limited company.
The rules pertaining to distribution of financial assets are based on whether an individual has made a proper will. If an individual dies intestate (without making a will), inheritance is primarily based on the law of inheritance in place for individuals based on their religion. For example, if a Hindu male passes away without a will, the Hindu Succession Act will come into the picture. In this Act, Class 1 and Class 2 heirs have been clearly defined. In case of Muslim Law, an individual can distribute one-third of his assets through a will and the rest inherited according to his religious laws.
You would require documents such as death certificate of the deceased, a court order if no will exists, or a copy of the probate that determines a court has certified the authenticity of the will.
Once assets are inherited by any lineal descendant/ascendant, no taxes are to be paid since no inheritance tax is in force in India.
Wealth tax
According to Indian tax Laws, no tax is applicable on the value of inherited property. However, wealth tax would be applicable if one possesses more than one property and the value of the holdings is more than Rs 30 lakh. In such a case, wealth tax at the rate of 1 per cent is applicable on the value of assets exceeding Rs 30 lakh.
Incomes are taxed
There are two forms of income which can arise on any inherited assets, either capital gains or regular income such as rental income, income from dividends, etc. Capital gain is subject to capital-gains tax as seen earlier.
If a person has inherited a property and resides in it and has only one house, rental income will not applicable as this house will be considered as self-occupied property. However, where an inheritor has more than one property, the second will be deemed let out and rental income will be considered on it. The rental income will be added to the income in the hands of the owner and will be charged according to the income-tax slab.
If the inherited asset is in the form of shares/mutual funds, the income received (or dividend) is tax free (according to Indian income-tax law, dividends are tax free).
MAKE THE WINDFALL WORK
* Make sure you have all the required documents with respect to the transfer of assets, along with a copy of the will
* Design a strategy to handle the assets received
* Consider applicable tax rates if any regular income or capital gains on sale are applicable
Most people see inheritance as money that can be spent without a care in the world. But inherited assets can go a long way in taking one nearer to financial independence and, therefore, investors should use such big assets in a way that can enhance financial freedom. Hence, at the very outset you should chalk out an appropriate strategy that will help you preserve your inheritance first.
As a very first step, those who inherit large sums of money must avoid thinking about it for some time at least. Or else you could be tempted to spend it. For the first few months, make plans of how you would like to use that inheritance, which may also include spending such as the much-needed refurbishing of your house, but take time to ponder over such decisions before you execute them.
No tax on inheritance
According to the present Indian income-tax law, no tax is applicable on inheriting property in India. However, tax is applicable when one sells it. For instance, if you sell inherited property, capital-gains tax is applicable on the same. In order to arrive at the amount of the gains, one deducts the cost/expenditure incurred when purchasing/acquiring a property and any cost incurred directly on selling it. If the property was acquired before April 1, 1981, you have the option to consider the original purchase cost or the market value on April 1, 1981. If the property had been purchased three years before, one can avail of the indexation benefit in order to reduce the capital-gains tax on the property. This is similar to how one would have calculated taxes for a self-owned property. When determining whether assets are long term or short term, the holding period of the previous owner is to be considered.
If the inheritor is an NRI, the purchaser of the property is required to hold back the tax amount "Tax at Source". However this can be avoided if either the purchaser of the property makes an application u/s 195 (2) or the seller (the NRI inheritor) submits an application u/s 197. Proceeds from the sale of the property are credited to the NRO A/c, which can be repatriated.
If an individual inherits any financial assets in India, no tax has to be paid on them. However, if these assets lead to generation of income/gains, tax has to be paid accordingly. Such financial assets include mutual funds, shares, debentures, fixed deposits, unlisted shares or even a majority stake in a private limited company.
The rules pertaining to distribution of financial assets are based on whether an individual has made a proper will. If an individual dies intestate (without making a will), inheritance is primarily based on the law of inheritance in place for individuals based on their religion. For example, if a Hindu male passes away without a will, the Hindu Succession Act will come into the picture. In this Act, Class 1 and Class 2 heirs have been clearly defined. In case of Muslim Law, an individual can distribute one-third of his assets through a will and the rest inherited according to his religious laws.
You would require documents such as death certificate of the deceased, a court order if no will exists, or a copy of the probate that determines a court has certified the authenticity of the will.
Once assets are inherited by any lineal descendant/ascendant, no taxes are to be paid since no inheritance tax is in force in India.
Wealth tax
According to Indian tax Laws, no tax is applicable on the value of inherited property. However, wealth tax would be applicable if one possesses more than one property and the value of the holdings is more than Rs 30 lakh. In such a case, wealth tax at the rate of 1 per cent is applicable on the value of assets exceeding Rs 30 lakh.
Incomes are taxed
There are two forms of income which can arise on any inherited assets, either capital gains or regular income such as rental income, income from dividends, etc. Capital gain is subject to capital-gains tax as seen earlier.
If a person has inherited a property and resides in it and has only one house, rental income will not applicable as this house will be considered as self-occupied property. However, where an inheritor has more than one property, the second will be deemed let out and rental income will be considered on it. The rental income will be added to the income in the hands of the owner and will be charged according to the income-tax slab.
If the inherited asset is in the form of shares/mutual funds, the income received (or dividend) is tax free (according to Indian income-tax law, dividends are tax free).
MAKE THE WINDFALL WORK
* Make sure you have all the required documents with respect to the transfer of assets, along with a copy of the will
* Design a strategy to handle the assets received
* Consider applicable tax rates if any regular income or capital gains on sale are applicable
The author is CEO, Right Horizons