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What happens when there is no will

What happens when there is no will
Harshada Karnik
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First Published: Thu, Jan 06 2011. 09 10 PM IST

Graphic: Shyamal Banerjee/Mint

Updated: Thu, Jan 06 2011. 09 10 PM IST

Insensitive as it may sound, financial matters crop up very soon after the demise of a loved one.
And, if by any chance the person died intestate, that is without making a will, it could become
complicated. If a person dies intestate, then the assets are distributed as per the succession laws
of the religion the person belongs to. But if there is more than one heir, distribution of assets can
lead to bitter battles, given that some assets are more lucrative than others, especially when you
take into account the tax implication.
During the course of a lifetime, individuals acquire all kinds of big and small assets that need to
be passed on to the rightful new owners. Says Anju Gandhi, partner, SN Gupta and Co., a law
firm, Today an average middle class couple in their 60s will have a portfolio consisting of at
least one house and possibly a second house or a farmhouse as well, a car, some jewellery, gold
and other artefacts. Apart from this, they may also have investments in mutual funds, fixed
deposits and the proceeds from the insurance policy which could amount anything between Rs1
crore and Rs5 crore.

Who can stake a claim?

All your class one legal heirs have equal rights to your assets. In case of Hindus, class one legal
heirs include your mother, spouse and children. If any of your children has died, then their
children and spouse have an equal share.
If you have no class one legal heir, then your class two legal heirs can stake a claim. Class two
heirs include your father, siblings, living childrens grandchildren and siblings children, among
others.
Consolidating assets
Usually, if a will exists, then at least there is record or list of all the assets the person owns. If
not, the difficulties begin with consolidating assets.
Graphic: Shyamal Banerjee/Mint

Consolidating the assets is by far the most

important and difficult step, says Gandhi. How
do you know what are the assets of the deceased,
especially if he has been managing everything on
his own? People dont always reveal everything in
their Form 16 or when they file income-tax
returns.
Sujoy Kumar, partner, Kocchar and Co., a Delhi-based law firm, has some suggestions on how to
track the assets. Those who hold sizeable assets tend to at least record them for their own
convenience even if they dont make a succession plan. But then there are others who are
negligent or plain careless. If you look in the most obvious places such as their office drawer or
files at home where they maintain the papers, or talk to their lawyer, consult the Form 16 or
income-tax returns receipt, you are more or less likely to be able to consolidate all their assets.
Consolidating the assets is just the first step. Once you have a list of assets, the next step is to
approach each institution to get the funds or assets released. You will have to follow different
procedures for movable and immovable assets.

Movable assets
These include bank deposits, mutual funds and other investments, such as post office schemes,
made with financial institutions.
At the time of investment, almost all of these require the investor to fill up a nominee name. If
the nominations are in place, then, in all likelihood, banks and financial institutions will release
the funds, irrespective of the amount, to the nominee mentioned.
But remember that a nominee is only a trustee of the funds, which he is expected to safeguard till
such time as the legal heir or beneficiary can be determined and the proceeds can be passed on to
him. This means that although the banks or financial institutes release the money to a nominee,
other legal heirs can stake claim.
Kumar adds, This (nominee) is something the financial institutes have in place for their
convenience. They dont want to get involved in a dispute, and hence usually while releasing
funds to the nominee, they get an undertaking signed from him.
Even if there is no nominee and the amount is fairly small, banks will release the funds up to a
limit, provided the person withdrawing the money signs an indemnity stating that he is in
possession of the money and will be held responsible for payments in case a more authentic
claimant appears. These limits vary from bank to bank, according to their internal policy. The
Reserve Bank of India has issued guidelines for banks asking them to determine their internal
policy and thus arrive at a threshold to release funds, says Gandhi.
If, however, the funds are in excess of this limit and there is no nominee, then the banks will ask
the person staking a claim to produce a succession certificate. If there is a nominee, then banks
will release the funds to him after doing the prescribed documentation. However, if they have
any doubts, suspect fraud or anticipate any dissent, they may ask you to produce a succession
certificate, says Gandhi.
A succession certificate establishes who the legal heirs of the deceased are and gives them the
authority to inherit debts, securities and any other assets. The beneficiaries can file a petition for
a succession certificate in a district or high court as the two have concurrent jurisdiction. The

petition usually mentions the relation of the petitioner with the deceased, details of other
surviving legal heirs, the time, date and place of death of the deceased and the fact that the
deceased died intestate. The court, after examining the petition, issues a notice to all the
respondents. It also issues notice in a newspaper and specifies a time frame (usually one and a
half months) within which anyone who has objections may raise them. If no one contests the
notice and the court is satisfied then it passes an order to issue a succession certificate to the
petitioner. If there are more than one petitioners, then the court may jointly grant them a
certificate, but it will not grant more than one certificate for a single asset, Kumar adds.
Once the assets are released, they can be handed over or transferred to the beneficiary. Usually
the nominee for each asset if different and they are more or less fairly distributed so families
settle these matters verbally among themselves. However if any of the heirs is dissatisfied and
takes the matter to the court, then the assets are distributed by the court as per the succession
laws applicable to the deceaseds assets, according to the state and religion. says Gandhi.
Immovable assets
In case of an immovable property that is not disputed, only the title of ownership has to be
changed. This can be done at the relevant district authority under whose jurisdiction the property
falls.
For instance, says Kumar, If its an agricultural land, then it will go to the revenue department
concerned and if its an apartment in Delhi, it will go to the Delhi Development Authority.
To get the holding transferred in you name, you would require a series of documents, such as a
formal application and an affidavit, the death certificates of the deceased and any other deceased
class one legal heir, relinquishment deeds from legal heirs who are willing to concede their share,
indemnity bond and undertaking and anything else that may be demanded.
But if the matter goes to the court, the court will first ask the beneficiaries to determine if the
property can be divided physically. For instance, if you own a three-storey house and have three
children, then each son can be given one storey although the value of each floor will not be the
same. For instance, the first floor may be expensive than the ground floor. The price of the entire
property is, thus, evaluated and the cost of each individual share is valued and they are asked to

pay each other the difference. If this is not possible, then one heir can buy out the share of the
other. For instance, if you die leaving one house and two legal heirs, then the physical division of
a single apartment is not possible. In this case, one heir can buy out the share of the other. This is
called right of pre-emption.
Another solution is that the heirs sell off their shares to an outsider but there is a problem. Says
Kumar: If it is a Hindu undivided family, then the outsider cannot claim possession of his share
till the time when the property is physically divided or liquidated. For instance, if out of three
brothers, one sells his share to an outsider, then it is transferred to his (the outsiders) name but
he (the outsider) cannot use it, till such time when the property is somehow physically divided or
sold off.
The final resort is to liquidate the asset and divide the proceeds between the legal heirs. These
proceeds are again divided as per the succession laws applicable to the deceaseds estate.
Besides, the court charges a fixed proportion of the estate as fee. So it is in the interest of the
beneficiaries to reach an amicable solution among themselves as much as they can and take to
court only those assets that they just cant divide on their own, says Gandhi.
The upper limit of the court fee is usually fixed. For instance, in case of the Bombay high court it
is Rs75,000. Apart from this, you will have to bear the lawyers fees and the costs of various
transactions. The entire process can take about six months to obtain simple uncontested
certificates and permission. Besides, various intermediaries eat into the value of the estate.
You would never want that the assets you carefully built over a lifetime for your loved ones
become the bone of contention among them after your death. Writing a will and having
nominations in place may solve this and various other problems for your heirs.

There is widespread confusion about taxation surrounding an inherited property. In this

article I will discuss various issues related to taxation on inherited property.
Taxation on annual basis
Every person who owns a property is taxed under the head Income from house property
on annual basis. The basis of taxation is annual value of the property which in turn is
derived from the rent received or reasonable rent for which the property is expected to fetch.
In respect of the only one self-occupied house property, the annual value is taken as nil. For
let-out property, the value of annual rent received is taken as annual value generally.
A standard deduction @30% of the annual value/rent received is allowed in respect of letout property or additional self-occupied properties where notional rent is offered for tax.
Since the annual value of one self-occupied house property is nil, no deduction is effectively
available in respect of repairs.
In addition to the deduction for repairs, you are entitled to deduction for interest paid to
purchase. So in case you have inherited the property without any outstanding loans, you will
not get any deduction for interest. However, in case any money is borrowed by you for
repairs, renovation etc of the inherited property, you will be entitled to get deduction of up
to Rs 2 lakh in case such loan is taken after April 1, 1999.
Taxation on sale of property
People believe that money received on sale of an inherited house is fully exempted from tax.
This is not correct. Yes, any asset received as inheritance is fully exempt from gift tax but
amount on sale of such asset is not exempted from tax. It will be taxable under the head
capital gains.
The capital gains may be short term or long term depending on the period for which the
asset was held. In case the inherited property is held for more than 36 months, it is
considered as long term. While calculating the holding period of the house inherited by you,
the period for which it was held by the previous owner is also to be added to your holding
period.
Long-term capital gains are calculated by deducting the cost of acquisition of the assets as
enhanced by the cost inflation index applicable based on the year of purchase and year of
sale. You are also entitled to deduct cost of improvement of the house as indexed with
reference to the year of such improvement.
Since you have got the house as inheritance, you will think that whole of the money received
by you will be taxable in your hand as you have not incurred any cost. The legal position is
not so. So for arriving at the cost of acquisition, the value to be taken will be the amount any
of the previous owners has paid for it. For example, in case you inherited the house from
your father and he had inherited the same from his father and your grandfather had
purchased it for Rs 50,000, then the amount paid by your grandfather shall be considered
as the cost of acquisition for capital gains purposes. However, in case the asset was inherited
by you before April 1, 1981, you have the option to substitute the fair market value of the
property as on April 1, 1981, for the cost of acquisition. So in case the asset is inherited by
you after April 1, 1981, you will have to take Rs 50,000 as the cost of acquisition but apply
the indexation with reference to the year in which you inherited it as per the strict legal
reading of the provisions of law. However, there are various decisions of few high courts,
including Mumbai, Delhi and Gujarat where the courts have held that in respect of inherited
property, taxpayer will not only be entitled to substitute the cost paid by any of the previous
owners in case the asset is acquired after April 1, 1981, but also the taxpayer shall be entitled
to get the benefit of indexation from the year in which that previous owner had acquired the
house. In any case if the asset was purchased prior to April 1, 1981, you still have the option

to substitute market value as on April 1, 1981, but also get the indexation benefits from April
1, 1981, though you might have inherited the same later on.
Exemption from long-term capital gains
So do you have to pay tax on the long-term capital gains calculated as above or can you save
it? Yes, you can save the taxes. What you have to do is either buy one house within two years
from the date of sale of the inherited house or construct one house within a period of three
years. The amount of money required to be invested in another house is only the indexed
long-term capital gains as computed above and not whole of the sale value.
You have to utilise the capital gains before the due date of filing of your income tax return,
failing which you need to deposit the unutilised portion of the capital gains in capital gains
account scheme with an approved bank. Alternatively or additionally you can buy capital
gains bonds of either Rural Electrification Corporation or National Highways Authority of
India within six months from the sale of the inherited house. Please note that the maximum
amount of investment you can make is only Rs 50 lakh for saving capital gains tax.
From the above, it is clear that taxation provisions of inherited property are different than
normal property.
The author is Company Secretary of Bombay Oxygen Corporation Limited. The views
expressed in this article are his own