Tax Implications In Case of A Deceased Assessee

Amid the verge in COVID 19 cases in this second wave of the deadly pandemic, unfortunately, we have faced a lot of deaths in this second wave. Therefore, it is pertinent to discuss the tax implications in case of a deceased Assessee 

Computation of Income of the Deceased

All the income earned from the start of the year till death would be considered as the Income of the deceased. Any income earned from the assets inherited from the deceased is taxable in the hands of the legal heirs. A deceased person is entitled to all the deductions and exemptions for the entire year, but tax is levied only on the income earned till his/her death. However, the return of the deceased would include income till the date of death of Assessee.

Income earned after the date of death

While determining the taxability of the Income earned from the estate of the deceased person after the date of his/her death, it has to be determined whether the death was testate or intestate. In case of testate death income after the date of the death shall be taxable in the hands of the legal heirs.

In case of intestate death such income shall be taxable in the hands of the executors from the date of death till the date of the distribution. After such distribution is made income shall be taxable in the hands of the legal representative.

Legal representatives

Section 159 of the Income Tax Act, 1961 provides that where a person dies, his legal representative shall be liable to pay any sum which the deceased would have been liable to pay if he had not died, in the like manner and to the same extent as the deceased.

For the purpose of making an assessment (including an assessment, reassessment or recomputation under section 147) of the income of the deceased and for the purpose of levying any sum in the hands of the legal representative —

(a) any proceeding taken against the deceased before his death shall be deemed to have been taken against the legal representative and may be continued against the legal representative from the stage at which it stood on the date of the death of the deceased;

(b) any proceeding which could have been taken against the deceased if he had survived, may be taken against the legal representative; and

(c) all the provisions of this Act shall apply accordingly.

A legal representative is deemed to be an Assessee by virtue of section 159(3).

The liability of the representative Assessee, however, is limited to the extent to which the estate is capable of meeting the liability and it does not extend to the personal assets of the legal representative. If, however, the legal representative has disposed of any assets of the estate or creates charge thereon, then he may become personally liable. In such cases also, the liability will be limited to the extent of the value of the assets disposed of or charged.

Executors

Section 168 of the Income Tax Act, 1961 provides that the income of the estate of a deceased person shall be chargeable to tax in the hands of the executor to the estate of the deceased.

The executor shall be assessed in respect of the income of the estate separately from his personal income. Thus, there would be a separate PAN required for filing the return of the executor.

Executor shall be so chargeable to tax u/s 168 up to the date of completion of distribution of the estate in accordance with the will of the deceased. If the estate is partially distributed in a given year, then, the income from the assets so distributed gets excluded from the income of the estate and gets included in the income of the legatee. Legatee is chargeable to tax on income after the date of distribution. Even if the executor is the sole beneficiary, it does not necessarily follow that he receives the income in latter capacity. The executor retains his dual capacity and hence, he must be assessed as an Executor till the administration of the estate is not completed except to the extent of the estate applied to his personal benefit in the course of administration of the estate

This section applies only in case of testamentary succession, i.e. when the deceased has left behind a Will. In cases of intestate succession, the income from the assets earned after the date of death becomes assessable in the hands of the legal heirs as “tenants-in common” till the assets of the deceased are distributed by metes and bounds.

Capital Gain Implications

A transfer of a capital asset under a gift or a will is not regarded as “transfer” for the purposes of capital gains as per Section 47 of the Income Tax Act, 1961.  Hence, the question of capital gains tax can never arise.

For the recipient, amounts or property received by way of inheritance is a capital receipt and not “income”. Ordinarily, therefore, such receipt is not chargeable to tax. Section 56(2)(x), however, charges to tax, money or value of certain properties received by a person without consideration or for inadequate consideration. Proviso thereto exempts, inter alia, money or property received “under a will or by way of inheritance”. There is thus no tax in the hands of the recipient under this section.

Section 49 provides that when a capital asset becomes the property of an Assessee, inter alia, under a Will [section. 49(1)(ii)] or inheritance [section 49(1)(iii)(a)], the cost of acquisition of the asset shall be the cost to the previous owner. Correspondingly, section 2(42A) provides (in clause (i)(b) of Explanation 1) that in computing the period of holding the asset by an Assessee who had acquired the property under a will or inheritance, the period of holding by the previous owner shall be counted. The asset will qualify as a long-term capital asset or a short term capital asset accordingly.

Assessment proceedings

Where an Assessee has died during the course of the Income-tax proceedings, such proceedings may be continued against the legal representative from the same stage at which it stood on the date of the death of the deceased person.

Further, any assessment proceedings which could have been initiated if the Assessee had survived may be taken against the legal representatives.

Carry Forward and Set off of Losses

Sec. 78(2) of the Income Tax Act, 1961 provides that where any person carrying on any business or profession has been succeeded in such capacity by another person otherwise than by inheritance, that another person shall not be entitled to carry forward and set-off the losses incurred by his predecessor against the profits earned by him after succession. In case of inheritance, the heir would be entitled to carry forward the loss incurred by the predecessor.

Register Yourself on Behalf of another Person

The Legal heir of the deceased person needs to register himself as ‘Representative Assessee’ Further, in case of Estate of the deceased person, the Executor / Administrator who administers the estate of deceased person needs to register himself as ‘Representative Assessee’

Information/ Documents required to be submitted while making request

• Copy of the PAN card of Deceased
• Copy of the PAN card of the legal heir
• Copy of Death Certificate
• Legal Heir Certificate issued by Local Authority or Surviving member certificate issued by the Local Authority or Pension Order issued by Central/State Government or Registered will
• PAN of the Deceased
• Date of Death
• Surname of the deceased
• Middle Name of the deceased
• First Name of the deceased

Procedure for Registration of the Legal Heir on the Income Tax Website

• Visit e-Filing portal and enter your login credentials (legal heir’s login details).
• Go to ‘My Account’ –> Register as Legal Heir
• Provide the necessary details and attach a zip file containing the below documents

1. Copy of the Death Certificate

2. Copy of PAN card of the deceased

3. Self-attested PAN card copy of the Legal Heir, and

4. Legal Heir certificate.

• Click Submit.
• The request will be sent to the e-Filing Administrator.
• E-Filing Administrator will review, approve/reject the request and a confirmation e-mail is sent to the registered e-mail ID.
• After you have uploaded (Zip File) and submitted your request, you can also view the status by going to My Request List menu, post Login.
• After the request is approved the legal heir’s profile shall contain two representations: one is self and other as a representative of the deceased.
• On e-Filing administrator’s approval, the ITR Form of the deceased person can be uploaded via Legal Heir login.
• The Legal Heir should add his/her PAN in the verification part of the ITR Form, validate and generate the xml of the return (if using offline forms) and upload the return of the deceased using the Legal Heir login.
• The online ITR form of the deceased can also be uploaded using the Legal Heir login.
• The legal heir can go ahead with the filing of income tax return of the deceased by selecting the option of filing return as representative of the deceased and proceed with ITR filing in the same manner as would have been done if the deceased person would have survived.

The Legal Heir of the Deceased person will be given Full portal access rights except ‘Profile Settings’ & ‘Add/Register as Representative’ functionalities up to the date of authorization.

About the Author

Author is Gourav Goyal, working as Director – Assurance with Neeraj Bhagat & Co. Chartered Accountants, a Chartered Accountancy firm helping foreign companies in setting up business in India and complying with various tax laws applicable to foreign companies while establishing their business in India. He is a member of the Institute of Chartered Accountants of India (ICAI) since 2012. He has been conducting Statutory & Tax audit, Internal audit of large & medium scale Limited Companies, carrying out Bank Audits and providing services in the field of accounts, Income Tax & Company Law matters.