Inherited property, money or investments? 7-point tax checklist every heir must go through

Inheriting property, cash, or investments brings financial relief but it also comes with tax obligations that most heirs aren’t ready for. In India, inheritance is not taxed directly, but income earned from inherited assets is fully taxable. It’s up to the legal heir to settle the deceased's pending tax dues, file returns, and report future income correctly. Here's a step-by-step guide on what you need to do and in what order.

Income earned by the deceased up to the date of death is taxable and must be reported. Any legal heir can file this return as a 'representative assessee' under Section 159 of the Income Tax Act, 1961. Log in to the income tax e-filing portal, go to 'Authorised Partners', select 'Register as Representative Assessee', upload the PAN card, death certificate, and legal heirship proof and then file.

If TDS was deducted from the deceased's income, the legal heir acting as representative assessee can claim the refund. It goes to the deceased's operative bank account or, if that account is closed, to the heir's validated bank account added on the e-filing portal. Missing this step means leaving money on the table. Ensure the bank account is validated before submitting the refund request.

Legal heirs are responsible for clearing the deceased's unpaid taxes, penalties, and interest but only up to the value of assets they inherit. There is no personal liability beyond what you receive from the estate. If the deceased's total liabilities exceed the estate's value, heirs don’t have to pay the difference and may legally disclaim inheritance to that extent.

In India, inheritance doesn’t come with a tax bill but any income you make from those assets does. For instance, interest on fixed deposits, savings accounts, and bonds that you earn after someone passes away is taxable for you as the heir. The same goes for dividends from the shares or mutual funds you inherit. There is no special tax rate or exemption just because the asset was passed down to you. It is added to your regular income and taxed at your applicable slab.

When you sell an inherited property, shares, or gold, the cost of acquisition for calculating capital gains is what the deceased originally paid not the asset's value on the date you inherited it. The holding period also counts from when the deceased first bought the asset, not from when you received it. This can significantly reduce your taxable gains. Keep all original purchase documents and ownership records safe.

Generally, life insurance death benefits aren’t taxed under Section 10(10D). But, if you receive the payout in instalments, the interest part is taxable. If the money go to the estate rather than a named nominee, it becomes taxable as well. Even exempt payouts need to be disclosed under Schedule EI in your tax return. A head’s up: if the nominee isn’t a legal heir, they have to act as a trustee and hand over the funds to legal heirs.

Rent received from an inherited property is taxable from the date of inheritance. If multiple heirs share the property, rental income must be reported by each heir in proportion to their ownership share and not entirely by one person. Each inheritor can individually claim deductions under Section 24(a) and Section 24(b) of the Income Tax Act. Misreporting jointly-held rental income is a common error that can trigger income tax notices.