When a taxpayer dies, their income tax obligations do not end immediately. According to reports from Mint, any income they earned up to the date of their death during the relevant financial year remains taxable. If they have not filed their income tax return or have any pending tax dues, those obligations must be fulfilled. If the deceased person's total taxable income for the relevant financial year exceeds ₹2.5 lakh or as per provision of Section 139(1), it is mandatory for their legal heir or representative to file income tax return on their behalf. If it's not done within the due date, the legal representative can also file a belated return by 31st December of the relevant assessment year.
After a taxpayer's death, the responsibility for handling their financial responsibilities shifts to their legal heir or legal representative. As reported by Mint, under Section 302 of the Income-tax Act, 2025, the legal representative is required to fulfil the tax obligations that the deceased taxpayer would have been responsible for if they had been alive. The provision states that any tax proceeding initiated against the deceased before their death will be deemed to have been initiated against the legal representative and may be continued against them from the stage at which it stood on the date of the deceased's death. All provisions of this income-tax Act will apply to the legal representative accordingly, and they are deemed to be an assessee for the purposes of this Act.
The income tax law limits a legal heir or representative's liability of clearing tax dues to the value of the assets inherited from the deceased taxpayer. According to reports from Mint, "the liability of a legal representative shall be limited to the extent to which the estate of the deceased is capable of meeting the liability," according to the law mentioned in the income tax portal. For example, if the deceased person has left behind assets worth ₹2 lakh but they owe ₹3 lakh in tax, the amount will be recovered from those assets and legal heirs will not be required to pay the remaining ₹1 lakh from their own funds. The legal heir only becomes personally liable for paying taxes if they transfer, sell or distribute assets from the deceased's estate before clearing outstanding tax dues, but such liability is limited to the value of the assets that were transferred or disposed of.
For inherited shares purchased many years ago, taxpayers face specific capital gains calculation challenges. As per tax expert guidance, if the purchase value of shares is not known, then the cost of acquisition for the purpose of computing capital gains will be the fair market value (FMV) of the shares as on 31st January 2018, which was the date of introduction of the tax on long-term capital gains on equity shares. The tax rates for long-term capital gains on equity shares are currently 10% (if the gains exceed ₹1 lakh in a financial year) without indexation benefit or 20% with indexation benefit. If shares were purchased by the deceased 15-20 years back and sold after holding them for more than 1 year from the date of inheritance, the seller would be eligible for long-term capital gains tax benefits, with the holding period counted from the original acquisition date by the deceased.
