Inheritance is not only an emotionally charged issue, but has profound financial ramifications as well. On the one hand, it adds to your asset pile, and on the other, it drastically increases your tax burden.
The most confusing inheritance is property. Where is its place in your tax return? To begin with, you are liable to pay wealth tax on it. If you sell the property, the tax rate (long-term or short-term capital gains tax) will depend on when it was purchased by the deceased. In case you have made any improvement to it, you can add the cost to the price of the property and pay tax on the resultant profit.
If the house or apartment that you have inherited is in the same city as your own house, you will have to add a fair estimate of the rent of the property to your income even if it is unoccupied. However, if the property is in some other city, then you escape the addition to your taxable income.
In case of fixed-income instruments such as NSCs or FDs, you must disclose the accrued interest— of the year in which you inherit them—in your tax return. Narayan Jain, a Kolkata-based advocate advises to do the same for inherited stocks and mutual funds even though you need not pay tax until you sell them. Again, the date on which the shares and funds were bought by the deceased will be considered to determine the tax rate on the profit.
Often, inherited assets push you into a higher tax slab. There is little you can do about it, unless you are Hindu male. In such a case, you can create a Hindu Undivided Family (HUF) for the income from your inheritance. An HUF is a separate tax assessee and enjoys the same deductions as an individual, but managing it is tedious. "You must factor in the compliance cost of an HUF. Also, consider the impact of splitting the HUF in future," says Ankur Sharma, managing director of Taxspanner, an e-filing portal. If you are up to more paper work, there is no reason why you should not reduce the tax liabilities passed down to you.
Case Study
Ashok Kumar Gupta, 46, Delhi
Income: Rs 50,000 per month
Current asset allocation: Moved out of equities because of market volatility and to pay for a plot of land that he purchased in 2006.
Real Estate: 50 per cent, Debt: 47 per cent, Equities: 3 per cent
His tax plan for 2008-9 | ||
|---|---|---|
| Section 80C | His plan (Rs) | Our suggestion (Rs) |
| PF+VPF | 1,56,000 | 90,000 |
| ELSS | 30,000 | Nil |
| Ulip | 20,000 | 20,000 |
| Insurance | 55,000 | Nil |
| Pension plan | 10,000 | 10,000 |
| Total | 2,71,000 | 1,20,000 |
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