Abstract: The tax on an inherited portfolio just isn’t known as inheritance tax. It would not arrive at demise. It arrives years later, when the nominee lastly sells. And most buyers constructing wealth for the following technology have by no means thought of it.
India has no inheritance tax. But your nominee pays round Rs 39 lakh in tax on an inherited fairness mutual fund portfolio value Rs 3.5 crore, and nil on an inherited NPS account of the identical worth. The act of inheriting itself is rarely taxed. What occurs after the nominee receives the asset varies extensively by product, and most retirement portfolios are constructed with out accounting for these variations.
What occurs with mutual funds and shares
Two provisions of the Revenue Tax Act determine the end result.
Part 49(1) says the inheritor inherits the unique buy value. Part 2(42A) says the inheritor inherits the unique holding interval. The nominee’s clock didn’t begin the day they obtained the models. It began the day the deceased purchased them.
When the nominee redeems, capital beneficial properties tax applies on the total appreciation because the authentic buy date. For fairness funds, which means 12.5 per cent long-term capital beneficial properties tax on beneficial properties above Rs 1.25 lakh in a monetary 12 months.
That is the tax tail. Many years of compounded appreciation are compressed right into a single tax occasion when the nominee chooses to promote. Capital beneficial properties tax on fairness is deferred, by no means eradicated.
What occurs with NPS
The Finance Act, 2016, added a clear provision: your entire NPS corpus paid to the nominee upon the subscriber’s demise is absolutely exempt from tax. No carried-forward beneficial properties. No clock working from the deceased’s first contribution. The complete stability passes by way of underneath the proviso to Part 80CCD(3).
The coverage logic is easy. NPS sits within the Exempt-Exempt-Exempt class. Contributions, progress, and exit are all designed to be tax-free. The demise profit was aligned with EPF and PPF, each of which additionally move to the nominee tax-free.
One caveat. The exemption applies to the lumpsum. If the nominee buys an annuity from a part of the corpus, the pension obtained later is taxable as atypical revenue. For non-government subscribers, the nominee can take your entire corpus as a lumpsum, and the tax is zero.
The quantity
Take a 30-year SIP of Rs 10,000 a month in an fairness fund. Whole invested: roughly Rs 36 lakh. At a 12 per cent annualised return, the corpus at 12 months 30 is round Rs 3.5 crore.
Unrealised long-term capital acquire within the palms of the nominee: about Rs 3.14 crore. After the Rs 1.25 lakh annual exemption, tax at 12.5 per cent works out to roughly Rs 39 lakh, payable each time the nominee redeems.
The identical Rs 3.5 crore in NPS attracts zero tax on the nominee’s lumpsum exit.
The planning implication
This isn’t an argument for shifting all the pieces to NPS. NPS has a Tier-I lock-in to age 60, capped fairness publicity, and restricted partial withdrawals. Mutual funds and direct fairness provide what NPS can’t: full fairness participation, full liquidity, and short-horizon flexibility.
The argument is narrower. For wealth meant to move to the following technology, NPS performs a job that no general-purpose fairness asset can. It’s the solely equity-exposed Indian product that passes to the nominee with no tax tail. PPF and EPF do the identical work for the fixed-income slice.
The case for NPS is often argued on the premise of the Rs 50,000 deduction underneath Part 80CCD(1B). That’s the small argument. The massive argument is what occurs to your nominee on the day they promote.
Additionally learn:
I opened an NPS for the tax break. How do I get out?
Tips on how to revive your dormant NPS account
Tips on how to flip your NPS lumpsum right into a 25-yr retirement revenue
This text was initially printed on Could 19, 2026.
