In Pakistan, the taxation of inheritance and estate is governed by the Income Tax Ordinance, 2001, and the rules made thereunder. Inheritance is the transfer of property, money, or assets from a deceased person to his/her heirs, while estate refers to the total assets of a deceased person, including property, cash, investments, and other assets.
Inheritance and estate can have different tax implications, depending on the circumstances of the transaction. In general, inheritance and estate are subject to income tax in Pakistan, but there are certain exemptions and limitations that apply.
Inheritance
Under the Income Tax Ordinance, 2001, inheritance received by an individual or a company is subject to income tax at the applicable rate. However, there are certain exemptions and limitations that apply.
Firstly, inheritance received by a spouse, parent, grandparent, child, grandchild, brother, sister, nephew, niece, uncle, aunt, or cousin is exempt from income tax, regardless of the amount. This exemption also applies to inheritance received by a trust for the benefit of any of the above-mentioned relatives.
Secondly, inheritance received by an individual from a non-relative in excess of Rs. 1,000,000 is subject to income tax at the applicable rate. For example, if an individual receives inheritance of Rs. 2,000,000 from a non-relative, Rs. 1,000,000 will be exempt from income tax, and Rs. 1,000,000 will be subject to income tax at the applicable rate.
Finally, if an individual inherits property, the fair market value of the property at the time of inheritance may be subject to income tax as well. However, the fair market value of inherited property received by a spouse, parent, grandparent, child, grandchild, brother, sister, nephew, niece, uncle, aunt, or cousin is exempt from income tax, subject to certain limitations.
Estate
Under the Income Tax Ordinance, 2001, the estate of a deceased person is subject to income tax at the applicable rate. However, there are certain exemptions and limitations that apply.
Firstly, if the estate of a deceased person is valued at less than Rs. 5,000,000, it is exempt from income tax. This exemption also applies to any income earned by the estate, such as interest on bank accounts, dividends on stocks, or rent from properties.
Secondly, if the estate of a deceased person is valued at Rs. 5,000,000 or more, it is subject to income tax at the applicable rate. The tax liability is calculated on the total value of the estate, including property, cash, investments, and other assets.
Thirdly, if the estate includes a business, the value of the business is determined based on the net assets of the business. The net assets of the business are calculated by deducting the liabilities of the business from the total assets of the business. The tax liability on the business is calculated on the net assets of the business, and not on the total value of the estate.
In addition, any bequests made by the deceased person to a charitable organization or a person in need are exempt from income tax, subject to certain conditions and limitations. Charitable organizations include entities registered with the Federal Board of Revenue (FBR) as a charitable institution or a non-profit organization, and recognized by the government as such.
The amount of bequest that is exempt from income tax depends on the type of organization to which the bequest is made. For example, bequests made to a charitable institution or a non-profit organization are exempt from income tax up to 30% of the individual or company’s taxable income. Bequests made to a government hospital or educational institution are fully exempt from income tax. However, it is important to note that the total amount of bequests that are exempt from income tax cannot exceed 20% of the total taxable income of the individual or company.
Non-compliance penalties
Failure to comply with the provisions of the Income Tax Ordinance, 2001, with regard to inheritance and estate can result in penalties and fines. For example, failure to declare or disclose inheritance received in excess of Rs. 1,000,000 can result in a penalty of up to 100% of the tax payable on the undisclosed amount. Similarly, failure to maintain proper documentation and records related to the estate can result in penalties and fines.
Conclusion
In conclusion, the taxation of inheritance and estate in Pakistan is governed by the Income Tax Ordinance, 2001, and the rules made thereunder. Inheritance received by an individual or a company is subject to income tax at the applicable rate, but there are certain exemptions and limitations that apply. Estate of a deceased person is subject to income tax at the applicable rate, subject to certain exemptions and limitations. It is important for taxpayers to understand the provisions and requirements of the law related to inheritance and estate to avoid penalties and fines.