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In Pitru Paksha memorizing ancestors & their property taxation

CA Umesh Sharma 
on 15 September 2014


Karniti Part 54:

In “Pitru Paksha” memorizing ancestors & their property taxation.

Arjuna (Fictional Character): Krishna, the fortnight starting from 9th September to 23rd September is called as ‘pitrupaksha’ or ‘shraddhapaksha’. In these days our ancestors are remembered and rituals and offerings are made on this occasion. Let’s discuss, what care should be taken by the heirs regarding ancestral property under Income Tax Act?

Krishna (Fictional Character): Arjuna, today respect for elders is reduced due to culture of nuclear families. Elders are remembered due to love, affection, blessings, teachings they give us. It is necessary for the inheritors of ancestral property to have knowledge of applicable income tax provisions. If such provisions are complied, then heirs can enjoy the possession of property.

Arjuna: Krishna, what is meant by ancestral property?

Krishna: Arjuna, Property earned from own income and hard work is treated as one’s self-acquired or personal property. After death, when this property is inherited by legal heirs it is called as ‘Ancestral property’.  For E.g. When a house property is purchased by father and after his death is received by his son, and then it will become ancestral property for son. Similarly, a property inherited from forefathers, i.e., Property of grand father to father and further to grandchildren will also be treated as ancestral property. Ancestral property can be in form of movable and immovable assets. Movable property means bank deposits, cash, provident fund, shares, mutual funds, insurance policy, gold, jewelry, etc. Immovable property means land, plot, house, etc. 

Arjuna: Krishna, how does this ancestral property is legally transferred to the heirs?

Krishna: Arjuna, ancestral property can be transferred in the following ways:

1. Will: Arjuna, now-a-days trend of nuclear families is increasing. In today’s fast moving era, people are running after money. Hence, where there is a huge property, there are more disputes. As court cases continue for long number of years, not only the life of people spoils but anger, dislikes for each other increases which affects the next generations. In order to avoid such things and to maintain love and affection between relationships, everyone should prepare legally enforceable document i.e. ‘will’ describing how to dispose his property. In a will, creator of a will express his wish about which asset should be given to whom and information of distribution of property after his death in a written form. After his death Property is distributed as written in the will. A registered will is always preferable.

2. By Inheritance: If there is no will, then property is distributed equally among all the heirs as per the ‘Hindu Succession Act’. For e.g. Property of husband is distributed equally between wife and children’s. According to ‘Hindu Succession Act’ daughter is also given equal right in father’s property.

Further big royal families, business houses and millionaires usually create private trusts for their properties through which the trustees are benefited for generations. Ancestral property can also be transferred by creating “Hindu Undivided Family”.

In case of movable property such as bank deposits, cash, shares, insurance policy, etc., if nominations are made, there will be fewer problems in transfer. Similarly, in case of immovable property proper registration should be obtained on documents through court probate, etc. on Property Card, etc. Please note that along with assets, if there are loans or liabilities payables on ancestral property, then the same are to be repaid by the heirs.

Arjuna: Krishna, then what will happen of this ancestral/ inherited property in Income Tax Act i.e. whether the heirs will have to pay tax?

Krishna: Arjuna, ancestral/inherited property is exempt from income tax in the hands of heirs as per section 45. But if any income is earned out of such property, then it will be liable to tax in the hands of legal heir. E.g. If taxpayer inherited any house property out of ancestral property, it is exempt from tax. However if the same house is given on rent, then rent income received by the heir will be chargeable to tax. Further, if taxpayer sells such house property then capital gain tax is payable, for which cost of acquisition will be original cost of purchase by ancestor. Short term or Long term capital gain will be calculated accordingly. Also, the person receiving ancestral property has to include the same along with his own property for wealth tax purpose.         

Arjuna: Krishna, What about the transfer of ancestral/inherited trade, business, etc.?

Krishna: Arjuna, inherited business can be run by legal heir. All the movable and immovable business assets will be owned by him. Further legal heir should make necessary changes in the various tax registration numbers as required by different tax laws. Like, VAT registration should be transferred in the name of heir within given period of time as per the law. The legal heir is also responsible to file the last income tax return of deceased person. Further any pending legal assessment, scrutiny, etc. are to be completed by the legal heirs and pay the dues arising out of it, if any.

Arjuna: Krishna, what moral learning should be taken in this ‘Pitrupaksha’ and with respect to such inherited property?

Krishna: Arjuna, wealth existing today may not be there tomorrow. It is also true that money lost can again be earned, but loss of a person cannot be compensated. Hence one should not lose the happiness in greed of money. At every stage of life, blessings and cultural values given by elders benefit us, hence remember them instead of their property value. One should never keep expectation for the inherited property but should earn it by own capabilities. Also the property received should be utilized for good reasons and create an ideal example for coming generations. Some of the people send their parents, who do not have such property to old age asylum. One should not do this, because their blessings are priceless and incredible. One should not take care of parents, only by valuing the property which they own and in greed of inheriting it. In this ‘pitrupaksha’ instead of doing rituals and food offerings only, we should preserve their thoughts and values. Character building of person is more important than property building. Don’t value elders, rather give value to elders.

Dear CACLUBINDIA lovers, your comments please.

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