Mandatory Filing of Income Tax Return for "The Estate of the Deceased" in India
Author: Santosh K. Pawar, Esq.
March 2, 2021
Paying outstanding debts and taxes of the Deceased is a prerequisite for distribution of assets of the Deceased/The Estate of the Deceased.
Liability to pay income tax and filing of income tax return in India is a simple process regulated by Income Tax Act, 1961.
Familiarity with the procedural requirements may assist Legal Heirs in not only preventing unnecessary delays in distribution of the estate of the deceased but also prevent irreparable damage to family relationships.
Let us examine who is liable to file income tax return for “the Deceased” and “The Estate of the Deceased”.
Deceased vs. The Estate of the Deceased
“The Deceased” and “The Estate of the Deceased” are two separate legal and taxable entities.
“The Deceased” is taxed on income generated by an individual till the date of his/her death.
Upon death of an individual, separate legal and taxable entity, called, “the Estate of the Deceased”, automatically comes into existence.
The Estate of the Deceased automatically owns all assets owned by the deceased till the date of his/her death. The Estate continues to exist till it administers the estate, i.e., collects all assets and pays outstanding debts/liabilities, and distributes assets in accordance with law.
All income generated by the assets of the “The Estate of the Deceased” is deemed to be income of the Estate, and hence, the Estate files income tax return from the date of its creation and till it exists.
Liability of Filing Income Tax Return
Under Income Tax Act, 1961
Chapter XV of Income Tax Act, 1961, “Liability in Special Cases” specifies who is liable to file Income Tax Return in case of Death of an Individual and in case of the Estate of the Deceased Person under Section 159 and Section 168 of the Act.
Section 159 – Liability of “Legal Representative”
In case of Death of an Individual
As per Section 159 (1) of Income Tax Act, 1961, legal representative of the deceased has the liability to pay income tax of the deceased.
“Legal Representative” as defined under section 2(11) of Civil Procedure Code, is a person who in law represents the estate of a deceased person, and any person who intermeddles with the estate of the deceased.
“Legal Representative” is deemed to be an assessee, but his/her such liability is limited to the value of the asset so charged, disposed of or parted with.
The deceased person is not taxable after the date of his/her death. Hence, the liability to pay income tax and filing of tax return is limited to taxable income as of the date of death.
Section 168 – Liability of Executor/Administrator
In case of the Estate of the Deceased Person
Upon death of an individual, all of his/her assets automatically become assets of “The Estate of the Deceased”.
“The Estate of the Deceased” is a separate taxable entity.
Section 168 specifies that in case of the Estate of the Deceased Person, “executor”/ “Administrator” is liable to pay income tax and file timely income tax return for “The Estate of the Deceased”.
Section 168(3) clearly specifies that executor/administrator of the estate is liable to pay income tax and file income tax return for all the years, beginning from the date of the death till the date all assets are completely distributed to the beneficiaries of the estate according to their several interests.
Hence, it is mandatory to timely appoint “Executor” or “Administrator” for the Estate of the Deceased.
The “Executor” is appointed if the Deceased left behind valid and properly executed “Will” and named someone in the document to act as “Executor” of his/her estate.
If the deceased did not leave behind any valid and properly executed “Will”, authorized representative of the Estate of the Deceased is known as “Administrator”.
The appointment of “Executor” Or “Administrator” is done either by unanimous agreement of all legal heirs or by Court Order.
Two Separate Tax Returns are Required to be filed
for the Year when the Individual Died
Section 159 of Income Tax Act, 1961 read with section 168 of Income Tax Act, 1961, provides that two separate tax returns are required to be filed for the assessment year when the individual died, i.e.:
1. One Tax Return for the Deceased – which is filed by “Legal Representative” of the Deceased for income from beginning of the relevant assessment year (April 1 ___) till the date of death of tax payor; and
2. One for “the Estate of the Deceased” – which is filed by “Executor” or “Administrator” of the “Estate of the Deceased” for income generated from the date of death of the deceased till end of the relevant assessment year (March 31, ___).
“Executor” or “Administrator” obtains separate PAN for the Estate of the Deceased and files tax return for and in the name of “The Estate of the Deceased”.
“Executor” or “Administrator” must file income tax return for “The Estate of the Deceased” for all future assessment years till all assets/properties of “the Estate of the Deceased” dare distributed to lawful owners in accordance with law.
Income Tax Returns of the Estate of the Deceased for the following years
“The Estate of the Deceased” continues filing Income Tax Return for entire taxable income generated by “the Estate of the Deceased” till all assets are distributed in accordance with law.
Consequences of Non-Compliance of Tax Liability
Income Tax Act, 1961 of India authorizes assessing officer to order payment of interest, late filing fee, penalties and prosecutions for non-compliance with statutory requirements. The assessing officer has authority to -
1. Order payment of Interest on the amount of tax payable;
2. Charge mandatory late filing Fee of 10,000 rupees (effective from the financial year 2017-2018) for each return;
3. Levy Penalty (effective from April 1, 2017) @ 50% on the tax payable on under reported income, and up to 200% on “misreporting of income”; and
4. Order prosecution for “intentionally” not filing Income Tax Return by the prescribed dates or an issuance for the minimum period of 3 to 24 months with the monetary fine. Further if the tax revenue which could escape the assessment in any such case is Rs. 25 lacs or more, than there is a provision of 2-7 years of rigorous imprisonment along with the monetary fine.
To conclude, legal heirs must initiate process for administration and distribution of the Estate of the Deceased in timely manner. If unanimous agreement of Legal Heirs is not available for any reason whatsoever, court proceedings must be initiated to avoid double taxation and unnecessary tax liabilities.
Author: Santosh K. Pawar is managing attorney of Law Firm of Santosh K. Pawar. She is licensed to practice in India and U.S. She specializes in U.S. Immigration and NRI property matters. Her expertise includes consulting on property and transfer of inherited assets in India. For more information and assistance, contact by email at firstname.lastname@example.org, call at (585) 264-1649 or WhatsApp at (585) 474-0935.