Photo: iStock
Photo: iStock

The ‘legal representative’ has to file income tax returns that was payable by the deceased

The legal representative has to file tax returns on behalf of the deceased, to report the income earned by the deceased until the date of his death, and taxes deducted thereon

A man passed away on 25 June 2017 without a Will. He had joint investments in debt mutual funds and bank fixed deposits with his wife as second holder.

After his death, the wife redeemed the mutual funds and fixed deposits on their respective maturity dates. Bank was not intimated of his death, so even after his death, the bank continued to deduct TDS in the name of the deceased.

1. Are redemption proceeds of debt funds and bank fixed deposits considered capital receipts (and hence not taxed)?

2. If not, in whose name will the income be considered?

Regarding TDS:

(a) In whose income-tax return (ITR) will the credit for TDS deducted by the bank be available?

(b) If capital gains and interest are to be considered income of the widow, can she claim credit for TDS for the full financial year even when there would be a mismatch between the amount of interest declared in her ITR and the amount of interest paid for the full financial year appearing in the Form 26AS of the deceased?

—A.K. Gupta

We have presumed that the widow is the appropriate legal heir of the deceased as per the relevant law applicable to the deceased from an inheritance perspective. The money and property received by the widow as an inheritance are not liable to be treated as income in her hands. However, she will be liable to pay income tax in respect of any income arising from such inheritance. Any income earned by her as a legal heir (for example, capital gains and interest earned on deposits) and the taxes deducted thereon are required to be reported by her in the tax return filed by her. She will also be treated as a ‘legal representative’ of the deceased and will also be liable to income-tax on the income earned by the deceased until the date of death. She will need to register as a legal heir of the deceased with the income-tax authorities by providing the specified information and documents. She will then need to file an income tax return on behalf of the deceased, to report the income earned by the deceased until the date of his death, and taxes deducted thereon. All the provisions of the tax law will be applicable to the legal heir as they would have applied to the deceased. Income earned after the death of the individual will need to be disclosed in the personal income tax return of the legal heir. Consequently, credit of tax deducted and deposited under the Permanent Account Number (PAN) of the deceased can be included in the hands of the legal heir. However, in the absence of specific fields in the tax return to claim credit of taxes deposited under another PAN, tax authorities may raise a query for the mismatch of TDS. You should file a letter with the jurisdictional assessing officer communicating the claim of credit on this account.

My mother owns some land. She is likely to sell it and gift the money to us, her children. What all taxes would be applicable on this income for me. Further, what are the reinvestment options available to save tax.

—George Verghese

You and your siblings will not be subject to tax on moneys you receive as a gift from your mother, as gifts among family are not taxable income. It is advisable to document the gift in a gift deed.

When your mother sells the ancestral land, any gains arising from the sale would be taxable in her hands. The gains from the sale would be taxable as long-term capital gains (LTCG), if the land was held by her for more than 24 months. The resultant LTCG will be taxable at 20% (plus applicable surcharge and cess). The indexed cost of acquisition is reduced from the sale consideration of the land to determine the taxable capital gains. Indexation refers to using the Cost Inflation index (CII) notified by the tax authority in the years of purchase and sale, to determine the impact of inflation on the cost of purchase. However, if this property was originally acquired by her before 1 April 2001, she has the option of treating the Fair Market Value (FMV) of the property on 1 April 2001 as the cost of acquisition while computing taxes, instead of the actual costs incurred by you to purchase or improve the property. Such FMV will then be indexed using the Cost Inflation index (CII) notified by the tax authority as on 1 April 2001 (CII for FY 2001-02 is 100).

She can claim an exemption from taxes in respect of this LTCG if she reinvests the gains in the manner specified (that is, by reinvesting the gains in another property or in specified bonds that are non-transferable, as notified by the Government of India). In case the sales proceeds are gifted by her to you or your siblings, no exemption shall be allowed on the long term capital gains earned by her.

Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India.

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