Understanding Tax Implications for Inherited Assets During Legal Processes
When a family member passes away without leaving a will, the legal heirs often face complex tax questions regarding the assets left behind. This becomes particularly challenging when the transfer of these assets gets delayed due to legal procedures, as in the case of two brothers who inherited fixed deposits and shares from their father who died intestate in January 2025.
Tax Liability Timeline: Before and After Death
According to the Income Tax Act of India, the tax treatment of inherited assets depends on when the income was generated. The income earned up to the date of the father's demise in January 2025 must be reported and taxed under his Permanent Account Number (PAN). This final tax return should be filed by his legal representatives - in this case, the two brothers.
The crucial distinction comes for income generated after the date of death. Even though the transmission of assets might be pending due to legal formalities, any interest from fixed deposits or dividends from shares earned after January 2025 becomes taxable in the hands of the legal heirs.
How to Report Post-Death Income
Since no executor was appointed for the estate and the brothers are the confirmed legal heirs with defined shares under applicable succession laws, they must report subsequent incomes in their individual tax returns. The interest and dividends should be declared under the head "Income from Other Sources" for each relevant financial year.
This means that if the assets remain untransferred even in Financial Year 2025-26, the brothers must still pay taxes on the income generated by these assets during that period. The tax liability should be divided between them according to their respective shares in the inheritance as determined by succession laws.
Important considerations for legal heirs:
- The legal representative becomes responsible for any tax liability the deceased would have owed
- Income generated after death must be reported by heirs regardless of transmission status
- Proper documentation of the inheritance process is essential for tax compliance
- Consulting with tax professionals can help navigate complex inheritance tax scenarios
This tax framework ensures that income doesn't escape taxation during the transition period between death and asset distribution. Legal heirs should maintain detailed records of all income generated from inherited assets and consult tax experts to ensure full compliance with Indian tax regulations.
