Wealth Transfer & Estate Planning

India does not currently have an estate duty or inheritance tax — the Estate Duty Act 1953 was repealed in 1985 and has not been re-enacted. Assets inherited through a Will or intestate succession are not taxable in the hands of the inheritor under Section 56(2)(x) of the Income Tax Act 1961, which explicitly excludes property acquired by way of Will or inheritance from the definition of taxable gifts. However, income subsequently earned from inherited assets is fully taxable, and the cost of acquisition for computing capital gains under Section 49(1) of the Income Tax Act 1961 is the cost to the original owner (not the market value at date of inheritance), which can result in significant capital gains on a future sale of appreciated assets. Succession planning must also account for stamp duty on probate and Letters of Administration under each State's Stamp Act.

A Will is governed by Part VI of the Indian Succession Act 1925 for non-Hindus, and for Hindus, Muslims, and Sikhs, it is also valid under the Hindu Succession Act 1956 and personal law. A Will must be in writing, signed by the testator, and attested by two witnesses who must not be beneficiaries under Section 63 of the Indian Succession Act 1925. Registration of the Will under Section 18 of the Registration Act 1908 is optional but strongly recommended as it reduces the risk of challenge and simplifies the probate process. For tax efficiency, the Will should specify which beneficiary receives which asset — particularly appreciated securities and property — so that each beneficiary's holding period and cost basis (under Section 49(1) of the Income Tax Act 1961) can be tracked from the original acquisition by the deceased.

A Family Settlement Agreement (FSA) is a document under which family members mutually agree to divide jointly held or disputed assets, recognising pre-existing rights rather than creating new ones. The Supreme Court has held in multiple judgments (including Commissioner of Gift-Tax v. N.S. Getty Iyer) that a bona fide family settlement settling pre-existing claims does not attract gift tax or capital gains tax because there is no transfer of property — only recognition and partition of existing rights. Section 47(i) of the Income Tax Act 1961 exempts a distribution of capital assets on partition of an HUF from capital gains. The FSA must be bona fide, must involve a genuine dispute or need for division, and should be stamped and registered to be enforceable — an FSA made purely as a tax avoidance device has been challenged by the Income Tax Department.

Gifting appreciated assets to lower-taxed family members (e.g., adult children with no other income) allows future capital gains on sale to be taxed at the donee's slab, not the donor's — provided the recipient is an adult and the assets are genuinely transferred. However, Section 64(1)(iv) of the Income Tax Act 1961 clubs the income of assets gifted to a spouse back with the donor, making spousal gifting ineffective for tax reduction unless consideration equal to fair value is paid. For minor children, Section 64(1A) clubs their income (other than income from their own skill) with the parent having higher income — clubbing ends when the child turns 18. Gifting through a private trust with adult children as beneficiaries can achieve the income-splitting objective while maintaining asset control, but requires careful drafting to avoid the trust being treated as revocable under Section 61 of the Income Tax Act 1961.

The first step is an estate audit — cataloguing all assets (immovable property, listed and unlisted shares, mutual funds, bank accounts, insurance policies, digital assets, and overseas holdings) with their cost of acquisition, indexed cost, and estimated current market value, to model the prospective capital gains liability under Section 45 of the Income Tax Act 1961. Nomination should be updated for all financial instruments — bank accounts under Section 45ZA of the Banking Regulation Act 1949, mutual funds under SEBI (Mutual Funds) Regulations 1996, and insurance policies under Section 39 of the Insurance Act 1938 — as nomination ensures prompt release of assets to nominees even before probate. Shares in a private limited company should be reviewed for transmission provisions in the Articles of Association under Section 56 of the Companies Act 2013. A Lasting Power of Attorney under the Personal Laws (Amendment) Act 2019 and a registered Will should be prepared, and a trusted advisor should be briefed on the location of all documents, locker keys, and digital credentials.