Tips on handling tax matters and digital assets of a deceased person

Legal heirs must file tax returns for income earned in the year the dead passed away

Benjamin Franklin’s famous quote: "In this world nothing can be said to be certain, except life: death and taxes" has become even more relevant in today's context. Gopal Bohra, partner, NA Shah Associates says, "In India, a person is required to pay tax not only when he is alive but even after he dies." 

Last financial year, many of those who succumbed to Covid-19 would have earned sufficient income when they were alive to come under the tax net. But with their passing away the taxes on their incomes still have to be paid and Income Tax Returns (ITR) filed. Vivek Jalan of Tax Connect Advisory Services LLP, A multidisciplinary consulting Firm says, "Section 159 of the Income Tax Act says that where a person dies, his legal representative becomes liable to pay any sum which the deceased would have otherwise paid to the exchequer had he not died." 

Naveen Wadhwa, deputy general manager, Taxmann says, "You also need to check whether the deceased had bequeathed his assets or had died intestate (without making a Will). If a person died intestate, the estate left behind by him devolves immediately on his legal heirs according to the personal law under which the deceased was governed."  But if he had made a will and appointed an executor, the income from the estate of the deceased person shall be chargeable to tax in the hands of that ‘executor'.  

Registration and approval: To file the ITR, the legal representative/executor has to get registered as a legal heir on e-filing on the portal (See Box: How to register and get approved as a legal heir). After completing the required process, the department verifies the request and once it is approved, the legal heir is able to carry on all e-filing related services on behalf of the deceased. The E-filing Admin checks the availability of the request details and may approve/reject the request and an e-mail and SMS intimating the decision will be sent to the user who raised the request.

Two returns: Note, that the returns will have to be filed twice. Wadhwa says, "Income received by or accruing to, the deceased person till the date of his death shall be considered as the deceased person’s income." To begin with, you need to file two income tax returns. Let’s suppose a person died on August 17, 2020. One return is for the income earned from the start of the financial year (April 1, 2020) to the date of death (August 17, 2020). And the second income-tax return must be filed for income earned by the deceased from the date of his death (August 17, 2020) to the end of the financial year (March 31, 2021). Bohra says, "Thus, in the year of death, there will be two income tax returns–-one up to the date of death in the name of deceased by legal heir and another in the name of the estate by the executor. If the legal heir or executor fails to pay the applicable taxes, the tax department may initiate proceeding against the legal heir or executor to recover the dues."

Tax liability of legal heir: As per section 159 of the Income Tax Act, the legal heir is responsible for the payment of taxes and all other sums (penalty, interest, or fine) due to the deceased. Kapil Rana, founder & chairman, HostBooks Limited says, "It means all the penalty proceedings for a default of the deceased can be initiated against the legal heir from the stage at which such default stood on the date of the death of the deceased, and all the provisions of the Act shall apply accordingly." Every legal heir shall be personally liable for any tax payable by him in his capacity as legal heir. 

Things to keep in mind: First of all, one should get the death certificate of the deceased because this is the first document that has to be submitted to the authorities. Once a death certificate is obtained, one needs a legal heir certificate or surviving member certificate.  The income of the deceased earned after his/her death is taxable in the hands of the legal heirs. Note, if the total income of the legal heir, including the income of the deceased person from the date of death exceeds Rs 50 lakh, the legal heir will be required to provide the details of all assets and liabilities held by him at the end of the financial year in Schedule AL.

Digital property: In India, unlike in other jurisdictions such as the United States, there is no specific legislation for regulating the bequest of digital assets. Aditya Chopra, managing partner, Victoriam Legalis, Advocates and Solicitors, says, "Nevertheless, since succession laws include both movable and immovable properties of the deceased and there is no categorical exclusion of intangible properties, it may be said that digital assets can also be bequeathed like other movable and immovable assets." 

Due to a wide variety of social media handles, there are different policies for each one. As a general approach, the legal hair or any authorised agents may write to the concerned authorities of such social media handles to retrieve sensitive information, if any, of the deceased. Due to the absence of a concrete law governing digital or crypto currencies, the inheritance mechanism and liability of the legal heir remain uncertain. Sameer Jain, managing partner, PSL Advocates, and Solicitors says, "However, cryptocurrency predominantly being privatised virtual currency in nature, is regulated at the discretion of the private entities itself. Therefore, the terms and conditions as originally agreed upon by the deceased shall continue to be binding on the legal heir, as if the deceased was permitted to transfer or assign or inherit such digital currency.' 

How to register and get approved as a legal heir

Step 1: Visit www.incometaxindiaefiling.gov.in and login with the legal heir’s credentials

Step 2: Go to My Account> Add/Register as Representative

Step 3:  Select Request Type as “New Request” and “Deceased (Legal Heir)” in Category

Step 4: Enter name, permanent account number (PAN), and date of death of the deceased. Further, upload scanned copies of PAN, death certificate and legal heir certificate

Step 5: Click on submit to get acknowledgment from the department, with a transaction ID.