What is the difference between Gift and Inheritance Tax

What is an Inheritance Tax?

 Inheritance tax is also known as death tax as it is calculated basing on the fact that who owns the property after the deceased person. Generally, the amount of tax is calculated basing on the current value of the property received by the legal heir or beneficiary of the deceased person. In some of the cases, legal heirs are exempted from paying the inheritance tax or may face lower rates of taxes. However, friends or distant relative of the deceased may face higher rates of inheritance taxes.

What is a Gift Tax?

A gift tax refers to the tax where one individual transfers certain valuable property to another individual. It may be in cash or kind. Since it is Gift, the receiver is not obliged to pay the full amount for the gift to the giver. However, they can pay a lesser amount than the full value of the gift.  According to law, it is compulsory for the individual who is passing the gift to pay the taxes.

Relationship between Gift and Inheritance Tax

A gift tax is meant for prevention of individuals who are transferring their assets or money to avoid the payment of estate or inheritance tax.  An individual who inherit the property of a deceased person is required to inheritance tax. However, in case of gift tax, the individual who is gifting is obliged to report the same only if the value of the gift exceeds a specific sum. But, in case of inheritance taxes, the receiver of inheritance is liable to report the inheritance.

An analysis on Inheritance Tax and Gift Tax

Inheritance Tax

To remove the increase of wealth with the help of estate or inheritance, and also for protection of money in different means, the aforesaid taxes were introduced so as to decrease the income inequality level.

It is some way similar to wealth tax but it is not. Many rich individuals do charity so as to reduce the overall net worth of their property. This is a technique which reduces the tax liability after death on a larger picture but ultimately funds for the social causes.

Although the taxes are imposed, the estate still has a great value when it is rightly transferred to its rightful legal heir for their benefit. To avoid such kind of burden on the estate of an heir, there are certain rules which will be applicable for some businesses.

Income tax implications on inheritance

In case of death of an individual, the property of the deceased will pass on to his legal heirs as per the law.  In such case, there is no doubt that such transfer is done without any consideration in return. Thus, the same cannot be qualified as a gift as per the provisions under Income Tax Act, 1961.

However, provisions of Income tax Act, 1961, does not include a case of transfer under inheritance or will under the provisions of the gift tax. Accordingly, the law does not provide any provision for taxation of property received as a result of inheritance.

Tax on income from inheritance

Sometimes, the property inherited may become a source of income including rent, interest etc for the receiver of the inheritance.  When the legal heir or receiver of inheritance becomes the owner, ultimately the income generated from the use of such property will go to him. Thus, the new owner has to disclose the said income generated and accordingly must pay taxes.

 For example, Mr. Singh owns a commercial complex and provided the same on rent. The construction cost of commercial complex was Rs. 50 lakhs.  Currently, he gets a rent of Rs. 60,000 per month from the commercial complex.  After his death the said property was inherited by his son Mr. Aditya Singh. In this case, the transfer through will and the same cannot be considered as taxable. However, the rent received by Mr. Aditya Singh will be taxed under the "Head Income from House Property" under the provisions of Income Tax Act, 1961.

Tax on subsequent sale

Once the property is inherited, the owner has the right to sell it subsequently. If the owner does so, the income generated will be considered as capital loss or if loss occurs then it will be treated as capital loss on the part of the legal heir.

Further, the period of holding of property including the period of holding of deceased and legal heir ownership will be considered for determination of capital gains which may come under long term capital gains tax or short term capital gains tax.

For example, Mr. Kapoor inherited a property from his late father in the year 2017.  His father had bought that property in year 1997 for Rs. 20,000.  The property was sold for Rs. 3, 00,000 in the year 2018.  As the property has been held for more than 24 months including the holding period of both deceased father and legal heir son the capital gain will be considered as long term capital gain. Accordingly, Mr. Kapoor can claim for the benefits of indexation while determination of the capital gains.

Gift Tax

Gift taxes provide the advantage to the individuals in terms of tax savings. There are vast potential for an inheritance and the legal heir can enjoy the benefits of tax savings.  Still, in some of the places, gift tax is not imposed. This suggests that the individuals do not have a certain limit on how much tax on gifts can be imposed every year.  In case of gift that, gift is given while the giver is still alive and he or she can look on how the receiver enjoys the gifts and makes the best use out of it.

Gift Taxation in India

According to law, gift tax was amended in the year 2017.  Gifts received by any person are taxed on the part of the receiver under the head "Income from Other Sources" as per the normal rates of tax. The different kinds of gifts that are covered and its taxability have been discussed below mentioned paragraphs.

The provisions in respect of gift tax have been provided under Section 56(2)(x) of the Income-tax Act, 1961.  A table containing some brief details of the aforesaid provisions has been provided below;

Provisions Related to Stamp Duty

The provisions related to stamp duty value is similar as that of the provisions prescribed under Section 50C of the Income Tax Act, 1961. The details whereof are provided below;

For calculation of gift tax with regard to immovable property, the value of stamp duty is required to be considered. However, the value of stamp duty can increase due to several reasons. One of such reasons can be a relatable time gap between fixing of agreement consideration and registration date. Thus, the purpose of gift tax, the value of stamp duty as on date of fixing agreement the consideration required to be considered if the below mentioned conditions are fulfilled;

Agreement date and date of registration is different

Consideration may be either partly or fully paid through an A/c Payee cheque or bank draft or in any other means of transfer electronically prior or on the date of the transfer of the agreement.

Further, if the taxpayer has certain questions or dispute with regard to the stamp duty value as prescribed by the stamp duty valuation authority according to the provisions under the provision of Section 50C of the Income Tax Act, 1961. The tax officer needs to refer the same to the valuation office. It is the duty of the valuation officer to check the records and provide an opportunity of being heard and accordingly pass the order containing the order value in writing. A lower stamp duty value is generally adopted in case of gift tax.