Assets in India & Assets outside India
Global Assets
Assets out of India : Transmission (Inheritance) of assets governed by laws of respective foreign country.
- Assets in India : Transmission (Inheritance) of assets governed by laws of India.
Law governing succession of assets by Inheritance & Will
Law of Succession
On death of a person – Succession operates
Testamentary Succession : When a person decease afetr making a Will.
The Indian Succession Act
Muslim Sharait Law
Intestate Succession : When a person decease without making a Will.
Hindi Succession Act
Hindu, Sikh, Jain & Buddhist.
Muslim Shariat Law
Muslim
The Indian Succession Act
Christian & Parsi
What is Testamentary Succession & How does it operate ?
A Will valid under the Indian Succession Act, has to be made in respect of his / her Assets.
Essential of a valid WILL :
Will has to be in writing.
Identification of the person executing the Will.
Details of the assets to be bequeathed under the Will.
Names and details of the beneficiaries under the Will, to whom assets are to be bequeathed.
Signature of the person executing the Will, with date.
Signature of two adult witness with their identification.
Person signing the Will can sign before Notary Public or get the Will Registered.
Whether to sign the Will, without Notary, before Notary or get the same registered depends on the facts & circumstances of the case.
It is advisable to execute Declaration of the two witnesses confirming the fact that they are the witness of the Will. This Declarations can be filed in court at the time of obtaining the probate.
It is advisable to have a Doctor as a witness in case of aged person.
When should you revise your Will, prepare a new / fresh Will
It is imperative to make a new Will when:
the person to whom the assets are bequeathed dies.
It is advisable to make a new Will when:
one or both the witnesses to the Will dies.
new Will when the executor/s of the Will dies.
Final step in – Testamentary Succession :
Executor or Beneficiaries to make application before the Court along with Will to obtain a probate.
Court will demand declaration from witness & legal heirs. Court will issue public notice.
Court will issue a letter of administration with Will (Probate), which will make Will a conclusive document.
Effect of Nomination / Joint Holder (E or S):
On death of the holder of financial assets transmission of assets needs to be done in favour of the Nominee / Joint Holder (E or S).
Nominee / Joint Holder (E or S) is not the owner of the assets, he is merely a Custodian / Trustee. The real owner of the asset is the one who is the beneficiary under the Will in case of Testamentary Succession (where Will is made).
All institutions are obliged to honour the Probate issued by the Court.
Probate is a conclusive document for property bequeathed in favour of beneficiary.
In the absence of a Probate, the institution may prescribe procedure to accept a will without a Probate as document for transmission of asset
What is Intestate Succession & How does it operate ?
When a person dies without executing a Will, the process by which the assets of the deceased are bequeathed is called Intestate Succession.
Distribution of assets where Hindu dies without executing a Will : Hindu Male : Class I heirs
Hindu Female : Class I heirs
Sons, Daughters, Children of predeceased Son / Daughter and the Husband. (Father, Mother, Father-in-law, Mother-in-law not included).
All the assets are to be equally distributed among all the heirs, surviving at the time of his / her death.
Final step in – Intestate Succession :
Heirship Certificate / Succession Certificate is an order of the Court certifying the legal heirs of the deceased and the assets bequeathed to the legal heirs.
The legal heirs under the law of Succession should obtain a certificate of Heirship (Varsai Ambo / Pedhi Namu / Family Tree) from Mamlatdar office.
The legal heirs should then apply to the court to obtain a Heirship Certificate / Succession Certificate.
The Court will issue public notice and consider any responses received, thereafter issue a Heirship Certificate / Succession Certificate.
Effect of Nomination / Joint Holder (E or S) :
On death of the holder of financial assets transmission of assets needs to be done in favour of the Nominee / Joint holder (E or S).
Nominee / Joint Holder (E or S) is not the owner of the assets, he is merely a Custodian / Trustee. The real owner of the asset are the legal heirs of the deceased under Intestate Succession (When Will is not made).
All institutions are obliged to honour the Heirship Certificate / Succession Certificate.
Heirship Certificate / Succession Certificate is a conclusive document for property bequeathed the same.
In the absence of a Heirship Certificate / Succession Certificate, the institution may prescribe procedure to accept the certificate of Heirship (Varsai Ambo / Pedhi Namu / Family Tree) as document for transmission of asset.
Management of Assets (Moveable & Immovable) by Power of Attorney
For Movable Assets
Should be notarised in India or Abroad.
Should be stamped as per local Stamp Act, in Gujarat, it is Rs. 300/=.
Important clauses of POA to manage Movable Assets
- To carry out all the operations of Depository Account including instruction for debit & credit to the demat account.
- To carry out operation of Government supported savings schemes with specific mention of names.
- To carry out the affairs of a Hindu Undivided Family (HUF) where the NRI is the Karta of his HUF.
- To carry out the affairs of Partnership or Proprietorship Concern.
- To carry out functions as a Director of a Company.
- To make and accept all claims under a WILL or under succession.
- To encash fixed deposits even before maturity and close bank accounts (subject to acceptance by the bank).
For Immovable Assets
- If giver and receiver of POA holder both are in India
- Should be registered with respective Registrar where the property is located in India.
- If giver and / or receiver of POA are out of India
- POA should be executed & signed before Indian Embassy abroad and thereafter should be submitted in 90 days to registrar where the property is located. It will be stamped & verified by Stamp Duty Collector Office & District Collector Office. Giver & Receiver of POA both can execute and sign out of India.
- Appropriate stamp duty has to be paid, which is Rs. 300/= for POA to close relatives (father, mother, brother, sister, wife, husband, son, daughter, grandson, granddaughter) .
- When POA given to any person other than close relative, market value based stamp duty will be liable on the POA.
- It is advisable to give a Letter of Authority to a lawyer, to represent the parties before authorities in India, when the giver & receiver of POA is out of India.
Income Tax Planning for Assets received by Succession
Section 56 (x) :- Following are liable to Income Tax :
- any sum received without a consideration exceeding Rs. 50,000/=.
- any immovable property OR any property other than immovable property without a consideration or with inadequate consideration exceeding Rs. 50,000/=.
Exceptions
Provided that this clause shall not apply to any sum of money or any property received :
- From any relative (as defined).
- On the occasion of the marriage of an individual.
- Under a Will or by way of Inheritance.
- Under certain other cases under specified conditions
Can I receive any amount of asset under succession ?
Sec. 56 (x) does not lay down any limits (upper cap) on the value of the assets that can be received
THEN…
What is the maximum amount of assets that can be received under succession ?
Provision of Sec 68 of Income Tax Act needs to be considered :
- Where any sum is found credited in the books of an assessee maintained for any previous year and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not in opinion of the Assessing officer satisfactory the sum so credited may be charged to income tax as the income of the assesse of that pervious year.”
- Rate of tax for incomes made taxable U/s. 68 has been prescribed U/s. 115 BBE.
- The prescribed rate U/s. 115 BBE are :
- 60% + 25% Surcharge on basic tax + 4% Cess on total tax (including surcharge) = 78% (If disclosed in the Return of Income).
- 78% + 6% (10% of tax payable) [Penalty U/s. 271AAC] = 84%. (In case of detection during the Assessment Proceedings).
- Can invite prosecution (Imprisonment & Fine) U/s. 276C(1), 277, 277A of the Income Tax Act.
How to comply with Section 68 of the Income Tax in assets received in succession ?
- Identity of the person from whom credit received.
- Credit worthiness.
- Genuineness of transaction.
Jewellery which can be considered as explained :
- CBDT Circular in context of search & seizure proceedings provides :
- Gold Jewellery & ornaments
- 500 gms – Married lady
- 250 gms – Unmarried lady
- 100 gms – per male member
- Declared in wealth tax return (when Wealth Tax Act was in force).
- Jewellery reflected in the Balance Sheet as an asset.
- The above can be considered as explained assets.
Transfer by Will or Gift ?
Is it better to receive a gift of property from a close relative in his / her life time or under a WILL ?
- Both are exempted from Income Tax by virtue of Sec 56 (x).
- Is the WILL expected to be challenged ? This is the Deciding factor.
Tax planning ideas and succession
Scope of planning with the Will
- If assets are bequeathed by way of intestate succession than, it is received by defined legal heirs and not persons / entities of choice.
- Assets can be received by HUFs, Females, Minors etc., if assets are bequeathed under WILL.
With a Trust under a WILL
- One discretionary Family Trust can be created as a part of the WILL.
- A discretionary trust is liable to tax at the maximum marginal rate (presently 30% + Surcharge), but if formed under a WILL is liable to be taxed as a separate person at regular rates. Even deduction U/s 80 C is available.
- The Trust can have income other than business income (interest, dividend capital gains etc.).
- Discretionary Trusts are trusts where beneficiaries and / or shares of beneficiaries are not determined.
- Such Trusts are useful to take care of dependents decisively.
- Trustees can be empowered to distribute the income among the beneficiaries & at a certain stage even dissolve the trust.
- Shares of a company can also be bequeathed to such trust.
Joint holders of assets
In case of financial assets held in joint name, his / her share shall be in accordance with the investment made by each co-owner. The first holder is treated as the owner of asset, by the financial institution.
In case of immovable assets held in joint mode, share of each co-owner is as per the shares mentioned in the purchase document, if nothing is specified then all the joint holders will have equal share, under revenue law. Joint holders with undefined shares can discharge Income Tax liability as per their share in investment.
Joint holding in Immovable property cannot be on E or S (Either or Survivor) basis.
On death of one of the joint holders, immovable property does not get transferred automatically. It has to undergo process of transfer by Will / succession in respect of his / her name.
Taxability of income from assets received under inheritance in India
Immovable assets
Movable assets
Income Generating
Growth oriented (For RESIDENTS)
Growth oriented
Taxability on sale of assets received under inheritance
Immovable assets
Immovable Assets Agricultural land situated beyond the below limits are completely exempted
Agricultural land within this limits are liable to taxation as any other immovable assets
Movable Assets
Basic principles relating to formation & succession of HUF
Undivided Ancestral assets acquired / owned by the family are HUF assets. Gift from mother can also be source of HUF property as held in CIT vs. Satyendra Kumar (1998) 232 ITR 360(SC).
Self acquired properties of ancestors not HUF assets.
A family (including adopted child), consisting of only husband & wife can be recognized as Hindu Undivided Family (HUF) under the present interpretation of Hindu law.
There is no Deed required to form a HUF. HUF is created on happening of an event. Deed required by Bank / Income Tax are just affirmation of the formation.
A HUF as such cannot to be a partner in a partnership firm. The Karta can become partner and represent the HUF.
HUF can make investment and recognized in all financial assets.
HUF cannot make nomination as succession process is inbuilt in HUF.
By virtue of amendment to Sec. 6 of the Hindu Succession (Amendment) Act, 2005, daughters are co-parceners in the HUF and their rights and liabilities are equal to other co-parceners (sons & father).
Exception:
- “Provided that, nothing contained in this sub-section shall effect or invalidate any disposition or alienation, including any partition or testamentary disposition of property which had taken place before the 20th day of December 2004.”
Hence, this amendment does not apply to HUF partitioned before the above date but reactivated the rights of daughters on all HUF divided/undivided after that day.
The shares of each co-parceners and members of HUF are not fixed, till the time the partition is done.
On partition, all the coparceners (Husband, Son, Married / Unmarried Daughter) & member (wife) are entitled to equal share.
On death of any co-parcener, there is a deemed partition and his / her share goes to his / her legal heirs. Only coparceners can make a will of his / her share.
A member (wife) cannot make WILL in respect of her share. She cannot claim partition during her life time but she is entitled to share in the event of partition, during her life time.
The partition of HUF can be unequal if mutually agreed upon by the coparceners & member.
(CGT vs. N.S Getti Chettiar 91971 82 ITR 599(SC))
A coparceners or member can release himself/ herself form the HUF.
Only complete partition of HUF is now recognized under Income Tax Act.
After complete partition of HUF, coparceners/member desirous of reuniting can form a HUF without some of the coparceners / member.
Share received by an individual from partition of bigger HUF goes to his HUF, not his individual
When only one member remains or in case of partition in the HUF, the HUF ceases to exist, the same gets merged in the HUF / Individual assets.
The eldest coparceners in the family becomes the Karta. Any (adult person) other than the eldest coparceners can become Karta by mutual agreement.
Mother remains a Manager of the HUF on death of the Karta or till coparceners are minors.
Income tax planning for Hindu Undivided Family (HUF)
It is recognized as a separate “person” for purpose of taxation under Income Tax Act.
Insurance premium paid for its members can be claimed as a deduction by the HUF as a deduction U/s. 80 C, over & above other investments U/s. 80 C.
Tution fees of members of HUF cannot be claimed by the HUF U/s. 80 C.
HUF can have income earned by the virtue of its capital, supplemented by management of the affairs by the Karta.
Incomes like Salary, Commission, Professional Fees are not HUF incomes.
HUF can own a business, Incomes from ownership of expensive equipment / machine etc.
Any sum paid out of income of HUF to its members is tax free U/s. 10(2) of the Income Tax Act.
Agricultural income of ancestral land is HUF income.
Real nature of asset important to determine whose income whether that of HUF of Individual.
In case of agricultural land holding, revenue record might not recognize HUF holding, but nature & source of asset / income is important.
From its members:
Tax free in the hands of HUF, but income derived by the HUF on such gifted amount shall be clubbed to the donor.
From non members:
Taxable in the hands of the HUF, beyond Rs. 50,000/-. No clubbing provision is applicable.
Interest free Loans to HUF by Member
- Member can provide Interest free loan to HUF
- This loan should be from Member’s own fund.
- HUF can invest this loan and earn income.
- AO can not fix Notional Interest in the hands of Member. CIT Vs. H.H. Maharaja Family Trust (Gujarat High Court)
Gifts from HUF
To its members:
- Taxable in the hands of recipient.
To non members:
- Taxable in the hands of recipient.
A gift by a coparcener of his undivided interest in the coparcenary property either to a stranger or to his relation without the consent of the other coparceners is void.
Sec 10(2) Exemption two condition satisfied
- The individual is the member of HUF and
- The sum received is from the income of HUF.
Member of HUF receives money from HUF for following purpose
- Loan
- Gift
- Partition (partial or full)
Members can receive loan from HUF but it is repayable.
Gift is taxable as per Ahmedabad ITAT decision Gyanchand M Bardia VS ITO
Full Partition is allowed but partial partition not allowed in Income Tax.
- Assets in India & Assets outside India
- Law governing succession of assets by Inheritance & Will
- What is Testamentary Succession & How does it operate ?
- What is Intestate Succession & How does it operate ?
- Management of Assets (Moveable & Immovable) by Power of Attorney
- Income Tax Planning for Assets received by Succession
