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Income Tax (IT) and death of a person – Responsibilities of legal heirs

Most people are confused about the procedures regarding income tax that need to be followed after the death of a person.

Do you still need to file an income tax return? Do you close the file permanently at the IT department? Are gratuity and pension taxable? Read on for all the answers.

[Article inspired by a query from reader Anand]



When it comes to income tax, there are many issues that trouble legal heirs after a person’s death. Let’s have a look at some of the more common aspects.

Gratuity received after a person’s death

There is no income tax on gratuity received after a person’s death while in active service.

Gratuity payment to a widow or other legal heirs of any employee who dies in active service shall be exempt from income tax (Circular No. 573 dated 21.08.90)


Family pension received after a person’s death

Any family pension that you receive is taxable in your hands as “Income from other sources”.

However, a standard deduction of 33% of the family pension (one third of the pension) or Rs. 15,000, whichever is less, is allowed (under section 57(ii)(a)) to be deducted from the family pension. The remaining amount of the family pension is taxable.

(Note: Pension and family pension are different. If you receive pension after you retire, it is treated as salary, and is fully taxed – there is no standard deduction. If you get family pension after someone’s death, it falls under “Income from other sources” and a standard deduction is allowed.)


Filing of income tax return after death

This is covered under section 159 of the income tax act.

Even when a person dies, the assessment of his income is to be done upto the time of his death.

The legal representative of the deceased has to file the income tax return for the income on which the deceased would have been liable to pay income tax if he had not died.

On the return, the name should be mentioned as “late (name of deceased) through legal heir (name of person filing)”. The legal heir should also submit a copy of the death certificate of the deceased, and submit the Permanent Account Number Card (PAN Card) of the deceased.

Advance tax payments and self assessment tax payments are also to be done by the legal representative.

And who pays any income tax due? If the tax liability is large, there can be a dispute between heirs.

The tax is to be recovered from the estate of the deceased. Thus, all the legal heirs are liable upto the extent of the assets that they inherit.

Example

A and B receive Rs. 50,000 and Rs. 1,50,000 each after the death of their father. The tax liability of the father is Rs. 75,000.

In this case, A can not be liable to pay more than Rs. 50,000 (the upper limit), as that is what he inherited from his father.

Bottomline: You are not responsible to pay income tax of the deceased from your own money.


Income of the deceased after the time of his death

This would be taxed in the hands of the legal heirs inheriting the respective assets.

Example

A inherits a fixed deposit (FD) of Rs. 10,00,000. B inherits an apartment.

Interest received from the FD and rent received from the apartment before the death (in the financial year in which the person died) would be taxed as income of the deceased (as discussed above).

The interest received from the FD and rent received from the apartment after the death would be taxed in the hands of A and B respectively.

Tax on amounts received after someone’s death

If you receive money / property / shares / etc after someone’s death through a will, there is no income tax or gift tax on the amount received by you.

Of course, any income generated from such assets would be taxed in your hands.

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