Income Tax rules require the legal representative to pay tax and file ITR in case property is inherited from the deceased. This article discusses in detail the various tax compliances arising after the death of a person.
Benjamin Franklin had said that “there are only two things which are certain in life: death and taxes.” But in this world, even death cannot save a person from paying taxes. It’s really hard to lose someone. If this truth was not bitter enough, paying taxes and filing income tax return added insult to injury.
After the death of a person, the legal heirs have to go through legal compliances like inheritance of deceased property, the filing of income-tax return on behalf of deceased, so on and so forth. If the deceased person had some capital assets they are devolved on the legal heirs. However, income from such capital assets or any other income earned by the deceased person during the year has to be reported in the income-tax return being filed by the legal heirs on behalf of the deceased person.
This article enumerates all tax compliances which may arise after the death of a person.
1. Payment of tax on behalf of a deceased person
As per section 159 of the Income-tax Act, 1961, in case of death of an assessee, his legal representative is deemed as an assessee who shall be liable to pay any sum which the deceased assessee would have been liable to pay had he not died. However, the liability of the legal heir to pay the Income-tax shall be limited to the value of assets inherited.
2. Computation of income of the deceased
Income earned on account of a deceased person during the year has to be bifurcated into two parts – Income earned before the date of death and income earned after the date of death. A legal heir has to file a return on behalf of the deceased person for the income earned till the date of his death and Income earned thereafter from the inherited asset shall be considered as legal heir’s own income.
Income earned during the period of April 1 to the date of death shall be considered as deceased person’s own income. However, the legal heir has to file the income-tax return on behalf of the deceased person and pay tax accordingly.
Income earned after the date of death till the end of the financial year shall be considered as income of legal heir and shall be disclosed in his personal income-tax return.
3. Filing of income-tax return by the legal heir
In order to file Income Tax return on behalf of the deceased person, a person has to first register himself as a legal heir on e-filing website www.incometaxindiaefiling.gov.in in following steps:
Step 1: Go to https://incometaxindiaefiling.gov.in and login into the account of legal heir
Step 2: From the main menu go to My Account> Add/Register as Representative
Step 3: On the landing page, you need to select the relevant options from the drop-down boxes, which are as under:
# Request Type: ‘New Request’
# Add/Register as Representative: ‘Register yourself on behalf of another person’
# Category to Register: ‘Legal Heir’
Step 4: Click on ‘Proceed’ and on the landing page fill up the following information:
# Name of Deceased Person
# PAN of Deceased Person
# Date of Death
# Upload the scanned copy of PAN card of both deceased and legal heir, a copy of death certificate and a copy of legal heir certificate or Registered Will or Family Pension certificate or letter issued by the bank confirming the nominee to the bank account.
All these documents are to be uploaded in a zipped folder. The maximum size of the zipped folder shall not exceed 1MB.
Step 5: Click on Submit. After submission, you will get an Acknowledgement from the Dept. with a transaction ID
After completing the above process, the department shall verify the request and once it is approved, the legal heir will be able to use all services for the deceased through his own E-Filing account.
After successful registration, the legal heir has to file the return on behalf of the deceased. The legal heir needs to log in to E-filing portal using his own credentials to upload the ITR of the deceased person. At the time of the filing of the ITR legal heir will be given an option to choose the PAN of the deceased through a drop-down list for uploading his ITR. It is to be noted that in income-tax return, the name of the assessee should be mentioned as <<Late Name of Deceased Assessee through Name of Legal Heir>>. Further, the legal heir should add his PAN in the verification part of the ITR Form.
4. Carry forward and Set off of Deceased Person’s Business loss
When an individual succeeds in the business of his predecessor by inheritance, the successor is entitled to carry forward the loss incurred by the predecessor. However, the total period of carrying forward cannot exceed 8 assessment years immediately succeeding the assessment year for which the loss was first computed.
5. Tax on inherited property
Inheritance-tax was abolished in the year 1986. Therefore, legal heirs are not required to pay any inheritance tax on the inherited property.
Though there is no inheritance tax, yet there are certain Income-tax provisions which one should know to understand the taxability of gifts or inherited property.
When any money or property is received by a person without consideration or for inadequate consideration, it is considered as residuary income of the recipient. However, this provision does not apply to any sum of money or any property received under a will or by way of inheritance. Hence, the legal heir shall not be liable to pay any income-tax on inherited money or property.
Further, any transfer of a capital asset under a gift or will or an irrevocable trust is not regarded as transfer for capital gain tax purposes. Hence, transfer of capital asset under inheritance will not be chargeable to tax in hands of deceased as well.
Though no tax implication shall arise either in hands of a legal heir or deceased at the time of inheritance, yet capital gain tax liability arises in hands of a legal heir in case of subsequent sale of the inherited property. In such case, the actual cost of acquisition of the inherited property to the deceased person shall be considered as the cost of acquisition to the legal heir. While determining the period of holding of inherited assets, the period of holding of the deceased person shall also to be taken into consideration.
6. Reporting in Income-tax return
The Income-tax return being filed on behalf of the deceased person should be prepared in accordance with the following key points:
# Only income earned from April 1 of the financial year till the date of death shall be reported as income of a deceased person.
# Transfer of property of the deceased person to the legal heir by way of inheritance shall not be reported in the Income-tax return of the deceased person, because this transaction is not regarded as transfer for the capital gain purpose.
# Money or property received by legal heirs by way of inheritance shall not be reported in income-tax return because Section 56(2)(x) does not apply to money or property received by way of inheritance.
# Income earned from an inherited property after the date of death shall be considered as legal heir’s own income. It shall be reported in legal heir’s personal return.
# If the total income of legal heir, including the income of deceased person after his death, exceeds Rs. 50 lakhs, the user shall be required to provide details of all Assets and Liabilities held by him at the end of the financial year in Schedule AL. These details shall include all assets and liabilities including the assets acquired by way of inheritance.
# Sale of inherited property by legal heir shall be chargeable to tax as capital gain in hands of a legal heir and, accordingly is required to be reported under Schedule Capital Gains in ITR Forms.
If any refund of a tax has to be claimed in the Income-tax return of the deceased person, it is advisable to fill-up the details of the joint bank account as a convenient measure to receive the refund amount. If there is no joint account and legal heir fills-up the details of his bank account, then CPC shall ask the deceased person’s juridical Assessing Officer to verify the details of the legal heir. After verification, the CPC shall issue a refund in the name of the legal heir.
7. Surrender of the PAN Card
It is advisable to surrender the PAN Card of the deceased person after submission of his last income-tax return and payment of tax dues or receipt of a refund if any.
(By Naveen Wadhwa, DGM, and Dipen Mittal, Manager, Taxmann.com)