Library / Income-tax Act, 2025: The Professional's Master Guide

20. Retirement and Succession Planning

Retirement and succession raise questions that combine salary, capital gains, gifts and trust taxation. This chapter brings them together.

20.1 Retirement benefits and pension products

Product	Tax on contribution	Tax on accumulation	Tax on withdrawal
EPF	Employer share exempt within limits; employee share under section 123 (old regime)	Exempt up to limits	Exempt after 5 years of service
PPF	Section 123 (old regime)	Exempt	Exempt
NPS	Section 124: employer (both regimes), own (old regime)	Exempt	60% lump sum exempt; annuity taxable as income
Superannuation fund	Employer contribution within the Rs. 7.5 lakh cap	Exempt	Commuted portion exempt within limits; pension taxable
Annuity from insurers	Section 123 (old regime) for specified plans	Not taxed yearly	Annuity taxable

20.2 Reverse mortgage

A senior citizen who mortgages his house under a notified reverse mortgage scheme receives periodic payments from the bank. These payments are loans, not income, and the mortgage is not a transfer for capital gains. Tax arises only when the house is eventually sold by the bank to recover the loan.

20.3 Inheritance and wills

India has no inheritance or estate duty. Property received under a will or by inheritance is exempt from tax in the recipient's hands.
The recipient takes the cost and holding period of the previous owner for capital gains.
Income from inherited assets is taxed in the recipient's hands from the date of inheritance; income up to the date of death is taxed in the hands of the legal representative in the deceased's return.
The legal heir must file the return of the deceased for the year of death (and earlier years if pending), after registering as legal heir on the portal.

20.4 Private trusts

Type of trust	Taxation
Specific (determinate) trust: beneficiaries and their shares are known	Trustee taxed as representative assessee on behalf of each beneficiary, at the beneficiary's rates; if the trust has business income, maximum marginal rate (with exceptions)
Discretionary trust: shares not known	Taxed at the maximum marginal rate, with some exceptions (for example, trusts for dependants or created by will)
Oral trust	Taxed at the maximum marginal rate
Revocable trust	Income taxed in the hands of the settlor (sections 96 to 98)

Illustration 92: Family trust for a disabled dependant

Anil settles a trust by will for his dependent son with a disability, with the son as the sole beneficiary. The trust income of Rs. 6 lakh is taxed at the rates applicable to the son (not the maximum marginal rate), since it is a specific trust created by will for a dependant. This allows the son's basic exemption and slabs to apply.

Practice note

For clients planning succession, combine a registered will, clear nominations, and where needed a private trust. Transfers during life to spouse or daughter-in-law bring clubbing; transfers to adult children or parents do not.

Chapter summary

• EPF, PPF and NPS have different tax profiles at contribution, growth and withdrawal.

• No inheritance tax; heirs take the previous owner's cost and holding period.

• Private trusts are taxed based on whether shares are determinate; discretionary trusts at the maximum marginal rate with exceptions.