Inheritance of Shares
When listed shares are inherited through a will or succession, there is no tax liability at the time of inheritance; the inherited shares retain the original cost of acquisition paid by the previous owner, and the holding period includes the deceased's period of ownership for computing long-term capital gains.
India does not have an inheritance tax or estate duty at present, having abolished estate duty in 1985. As a result, the mere receipt of shares through inheritance — whether by will or under the laws of intestate succession applicable to the deceased's religion — does not create any tax liability for the heir at the time of inheritance. The shares are transferred to the heir's demat account through a legal succession process without triggering income tax.
The cost of acquisition assumes critical importance when the heir eventually sells the inherited shares. Under Section 49(1) of the Income Tax Act, the cost to the heir is deemed to be the cost for which the previous owner acquired the shares. This means the original purchase price paid by the deceased (or the fair market value as of 31 January 2018 for shares held before that date, under the grandfathering provision introduced in Budget 2018) becomes the heir's cost basis.
The holding period for determining whether the gain is short-term or long-term also includes the period for which the shares were held by the deceased. Since long-term capital gains on listed shares attract a concessional ten percent rate (on gains exceeding one lakh rupees) while short-term gains are taxed at fifteen percent, this aggregated holding period can make a significant difference. If the deceased held shares for over twelve months, the heir is immediately entitled to long-term capital gains treatment on sale, regardless of how long the heir has personally held them.
When multiple legal heirs inherit shares jointly, the shares may need to be split according to the will's provisions or relevant personal law. The depository participant process for transmission of shares to heirs requires submission of documents including the death certificate, succession certificate or probate (for larger estates), and the heir's KYC documents. The process varies slightly across brokers but is standardised by CDSL and NSDL guidelines.
Investors with significant share portfolios should consider estate planning tools — including nominations in demat accounts, a clearly drafted will specifying share distribution, and in complex family situations, a family settlement — to ensure smooth transmission and reduce the compliance burden on heirs during an already difficult period.