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Business News/ Money / Personal Finance/  Estate route is an advisable option for inheritance

Estate route is an advisable option for inheritance

A Will could have many heirs and no directions on how to handle income tax


On the demise of a family member, while securing cash flows to supplement the monthly income assumes top priority, the next is tax compliance. In such a situation, two distinct tax filings are possible viz. for a period starting from 1 April till the date of demise and post date of demise till 31 March.

As per the Income Tax Act, a representative assessee (legal heir) can file the return of income of the deceased. Eligibility of the legal heir for purpose of tax filings includes one who has legal heir certificate or possesses a surviving family member certificate or has a family pension certificate or is named in a registered Will or possesses a letter issued by a banking/financial institution certifying their name as a nominee or a joint account holder with the deceased. Legal heir referred here is not as per Succession Acts.

A Will could have many heirs and no directions on how to handle income tax , hence convincing a beneficiary to volunteer to take responsibility of tax filing could be a challenge.

As per Section 159(1) of the I-T Act, when a person dies, the legal representative is liable for tax payments for the deceased as if they had not died. Thus, a legal representative of the deceased is deemed to be an assessee, being personally liable for any tax payable, with such liability being limited to the value of the asset so charged, disposed of or parted with. A legal representative varies from legal heir as defined under Succession Acts.

Mr KM died on 30 June at 78 and was survived by a son and daughter (both overseas). He had a handwritten Will. It was valid as it was signed, with each page initialled, witnessed by two neighbours and had a doctor’s certificate. His caregiver carried out the rituals and last rites as the children could not come. A legal firm acted as an executor and shared his Will in which all assets were bequeathed to his children, with definitive sums of money for the driver, cook and caregiver apart from charity for cancer care.

The law firm made the driver a representative assessee, who filed the return of income of Mr KM (for income received from 1 April to 30 June). The interpretation banked on was that legal heirs as per the Hindu Succession Act, 1956, being overseas were unavailable for filing tax returns and they had expressed their intention to be complaint and not seek time extension for tax filings. Being an executor, the law firm was duty bound to perform their function of distributing all assets as per the Will and in this case as the beneficiaries were residing abroad, it was imperative that the executor follow the ‘estate route’. An application for PAN in the name of the estate was made, a dedicated bank account was opened and as all transactions post transmission were routed through this account. As there were immovable assets, it was a good strategy as the sale of immovable assets could extend the financial year end. For earnings post demise i.e from 1 July till 31 March, the return of income was accounted and filed by the executor under the estate and met governance standards with bequeath and distribution transparently and effectively recorded, monitored and accounted.

As per Section 168(1) of the I-T Act, the income of the estate of a deceased person shall be chargeable to tax in the hands of the executor. In order to de-link the executor from his/her own assessment, the estate route is most preferred and hence advisable. The executor includes an administrator or other person administering the estate of the deceased such as a law firm.

Here is another case study. Mrs AP died and was survived by two sons and a daughter. Her assets included a two-storeyed house with a barsati in NCR, agricultural land, bank accounts and other financial assets. She bequeathed the barsati to her married daughter and the other floors to her sons. The daughter proposed to buy out the second floor from one of her brothers as per the valuation formula proposed in the Will. The younger brother of the deceased was the executor as per the Will. Tax filing was a challenge as the beneficiaries shirked the responsibility of filing the tax returns of their deceased mother post the receipt of the bequeath. Due to the delay, the executor de facto became responsible to file the tax returns to meet compliance.

Rajat Dutta is founder, Inheritance Needs Services Pvt. Ltd.

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Published: 15 Nov 2021, 12:12 AM IST
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