Tax on deceased income

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

26 August 2014 Hello Dear,
My questions are as under:
1. if a person who has died never assessed to Income tax, his movable as well immovable property shall be treated as capital receipts or not in his legal heirs'hands?

2. "A" died some time ago having PAN but not filed any ROI, before dying he sold his house for rs. 1.87 crore, what will be tax status for him or his legal heirs? will they have to pay cap. gain tax or all receipt is capital recpt?
This is AIR transaction. will it change answer had it not been AIR transaction?
KINDLY REPLY BOTH QUES. SEPRATELY.
THANKS IN ADVANCE

Querist : Anonymous

Querist : Anonymous (Querist)

02 September 2014 This query is standing un resolved since 26.08.2014. Dear EXPERTS Kindly reply soon, its urgent

Aashok Kumar Sharma online

Aashok Kumar Sharma online

(Expert)
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26 July 2025 Your questions involve the **tax implications of income earned by a deceased person** and how it affects their **legal heirs**. Here's a clear and separate answer to both your queries:

---

## ✅ **Question 1**:

**If a deceased person was never assessed to tax, are his movable and immovable properties treated as capital receipts in the hands of legal heirs?**

### ✍️ Answer:

No, **inheritance of property (movable or immovable)** by legal heirs is **not considered income** under the Income Tax Act, 1961. It is treated as a **capital receipt** and is **fully exempt under Section 56(2)(x)** (Explanation: gifts from relatives are not taxable).

So:

* Legal heirs **do not pay tax** on simply **receiving the deceased's assets** (movable or immovable).
* However, **any income generated** from these assets **after inheritance** (e.g., rent, interest, capital gains on sale) **is taxable in the hands of legal heirs.**

---

## ✅ **Question 2**:

**"A" died after selling a house for ₹1.87 crore. He had a PAN but never filed returns. What is the tax treatment for the sale? Do legal heirs need to pay capital gains tax? Does AIR reporting affect this?**

### ✍️ Answer:

Yes, **capital gains tax is applicable** on the sale of the house by **Mr. A** **before his death**, and the **tax liability rests on his estate** (not directly on legal heirs for that transaction).

### Here's the breakdown:

#### 🔹 A. **If Mr. A sold the house before death:**

* The **capital gain** (i.e., sale consideration – indexed cost of acquisition) must be calculated for that year.
* Even if he never filed a return previously, **this transaction is taxable** in the year of sale.
* **Legal heirs or executor** of the estate are **responsible to file his final return (up to date of death)** under **Section 159 (Legal Representative)**.
* Any **capital gains tax due must be paid from his estate**.

#### 🔹 B. **If house was inherited and sold by legal heirs (after A’s death):**

* Then capital gains would arise in the hands of the legal heirs.
* Cost of acquisition will be **indexed cost in the hands of the original owner (Mr. A)**.
* Tax to be paid by heirs on their respective shares.

---

### 🧾 About AIR (Annual Information Return):

AIR is **just a reporting mechanism** for large transactions like sale/purchase over ₹30 lakhs (in case of real estate).

* It **does not change taxability**, but increases the chances of a notice or scrutiny **if tax return is not filed** or **capital gain is not reported**.
* In your case, since it is an AIR transaction, **non-reporting can invite a notice**, even though the person is now deceased.

---

## 📌 Final Notes:

| Question | Taxability | Responsible Person | Notes |
| -------------------------------- | ----------------------- | ----------------------------------------------------- | ---------------------------------------------- |
| 1. Inherited property | ❌ Not taxable | Legal heir | Treated as exempt capital receipt |
| 2. Sale by deceased before death | ✅ Capital Gains taxable | Legal heir to file return as representative (Sec 159) | Return must be filed even if never done before |
| If sold after death | ✅ Capital Gains taxable | Legal heir | Based on inherited cost |

---

Let me know if you’d like a **draft of return filing for deceased** or **capital gains computation template** — I’d be happy to help.

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