|Let us take an example to illustrate the concept of saving income tax for your successors. Suppose there is a family comprising of Mr. X, Mrs. X, their son A, and daughter B. Both the son and daughter are already married and have families of their own. Suppose, further, that A and B have one son each. A and B are both working and receive salary of about ` 50,000 per month. Mr. X has a wealth of ` 1 crore. He desires that after his demise, the entire wealth should be divided by giving away ` 50 lakh to his wife, and ` 25 lakh to his son and daughter. While planning to distribute the wealth in above manner we find that after the demise of Mr. X the legal heirs namely his wife Mrs. X as well as their son A arid daughter B inherit the assets in the ratio as has been outlined above.
Now when these assets are inherited by the successors of Mr. X, they would not be called upon to make payment of income tax on the assets so inherited. However, it may be noted that there is no income tax liability on the value of the assets inherited and the tax liability accrues only on the income subsequently generated out of the inherited assets. Let us presume that the investments by the legal heirs of Mr. X have been invested in such instruments of investments which will get them gross return of 10% per annum. Now when the time comes to make payment of income tax by the successors of Mr. X, we find that on income of ` 6 lakh generated by his wife Mrs. X, income tax would be payable. So also income tax would be payable on ` 3 lath income generated by his son A and the daughter B would also pay the income tax on ` 3 lakh being the income generated on the assets inherited by her. The rate of income tax on these incomes arising out of inherited assets would be 30%. Thus, every single rupee earned by the successors of late Mr. X will be at the maximum marginal rate of income tax of 30%.
Well, if you truly love your legal heirs and the successors to your estate, you should take personal interest in adopting a strategy which will go to reduce the income tax burden for your successors in the years to come. The simple solution which goes to plan and save income tax for years successor is try not to give the portion of your moveable and immovable property directly in the names of your legal heir or successor but give such assets in the names of other family members of your legal heirs who have lower income or no income at all.
For example, in the above illustration if might have been better if X had thought of giving ` 25 lakh not to his son A but to the wife of A, i.e. Mrs. A. We presume that Mrs. A has no other income. Now, if the assets were inherited by his successor in the name of Mrs. A then the income tax would be payable on the income accrued to Mrs. A on ` 25 lakh which estimated as above comes to ` 3 lakh. But the advantage now is that Mrs. A would not be required to make payment of income tax on the entire income of ` 3 Iakh but she would be called upon to make payment of income tax at the normal slab rates namely “nil” upto ` 2,00,000 income, and 10% on income between
` 2,00,000 to ` 3,00,000, i.e. ` 10,000 only. Just by resorting to this simple technique substantial tax saving is possible within the four corners of the law.