What Is The Tax On Inheritance In Pakistan?

 In Pakistan, inheritance is generally not subject to direct taxation. When a person passes away, their assets are transferred to their legal heirs according to the country’s inheritance laws, which are primarily governed by Islamic law (Sharia) for Muslims and civil law for non-Muslims. However, while inheritance itself is not taxed, some various taxes and obligations may arise during the process of transferring and managing inherited assets, particularly concerning property and financial assets.

Islamic Law and Inheritance in Pakistan

In Pakistan, Islamic law dictates the division of inheritance for Muslims. The rules of inheritance are based on specific Quranic injunctions that outline how assets should be distributed among the heirs. These laws stipulate fixed shares for heirs such as spouses, children, parents, and, in some cases, extended family members. For non-Muslims, the transfer of inheritance is handled according to the Succession Act, of 1925, which defines how assets should be distributed based on civil law.

While the act of inheriting property or assets is not directly taxed, various taxes may apply to the assets or transactions related to inheritance.

Taxes on Inherited Property

The most significant taxes related to inheritance in Pakistan arise in the context of immovable property (such as land, houses, or commercial property). The inherited property itself is not subject to an inheritance Tax Calculator Pakistan, but several other taxes may apply when the heirs wish to transfer, sell, or utilize the property.

Capital Gains Tax (CGT): If an heir sells inherited property, Capital Gains Tax may be levied on the profit from the sale of the property. This tax is applicable if the property is sold within a certain period after inheritance. The assessment rate for capital increases on undaunted property fluctuates given the holding time frame:

Assuming the property is sold in something like one year, the expense rate is higher (regularly 15%).

If the property is held for more than one year but less than two years, the tax rate reduces.

No CGT applies if the property is sold after four years of inheritance.

In any case, if the main beneficiary holds the property and doesn't sell it, no capital additions charge is applied.

Withholding Tax: If the heir decides to transfer or sell the property, withholding tax may apply to the transaction. This tax is imposed at the time of transferring ownership and is generally higher for non-filers (those who do not regularly file income tax returns) than for filers. The tax rate ranges from 1% to 2% of the property’s value.

Stamp Duty: When inherited property is transferred to an heir, stamp duty is levied as part of the documentation process. Stamp duty is usually a percentage of the property’s assessed value, and rates vary from province to province. In most cases, stamp duty ranges between 1% and 3% of the property’s declared value.

Registration Fees: Besides stamp duty, property registration fees are also required when transferring ownership. This fee is typically charged by the local authorities or the registrar’s office and varies depending on the property's location and the government regulations in that area.

Taxes on Inherited Financial Assets

Inheritance of financial assets such as bank accounts, investments, shares, and other movable assets is also not directly taxed. However, in certain cases, indirect taxes or obligations may arise:

Zakat on Bank Accounts: Inherited bank balances and savings may be subject to zakat deduction under the Zakat and Ushr Ordinance, 1980. Zakat is deducted annually from bank accounts above the nisab (threshold) level at a rate of 2.5%. This is not a Tax Calculator Pakistan but a religious obligation, though it is enforced by the government on certain types of financial assets.

Withholding Tax on Dividends: If an heir inherits shares in a company or other investment assets that generate income, the heir may be liable to pay withholding tax on dividends or other investment income. The tax rate on dividends is typically 15% for filers and higher for non-filers.

Wealth Statement: Heirs are often required to declare inherited assets in their annual wealth statements when filing income tax returns. While the inherited assets themselves may not be taxed, they are included in the individual’s overall wealth profile, and failure to declare them can result in penalties.

Inheritance and Wealth Tax

Currently, Pakistan does not impose a wealth tax, but inherited assets increase an individual’s net wealth, which may have implications if such a tax were introduced in the future. Abundance charges are exacted in light of the worth of an individual's all-out resources, however, at this point, there is no such duty in Pakistan.

Estate Duty and Historical Context

Previously, Pakistan had an Estate Duty that functioned as an inheritance tax. This tax was applied to the value of an estate left by a deceased person and was abolished in 1979. Since then, there has been no direct tax on inheritance itself. The government of Pakistan, like many other countries, discontinued estate duty as part of its policy reforms.

Conclusion

In summary, inheritance in Pakistan is not directly taxed under the current legal framework, meaning that heirs do not have to pay a specific "inheritance tax" on the assets they receive. However, several other taxes, such as capital gains tax, stamp duty, withholding tax, and registration fees, may apply when transferring or dealing with inherited assets. Hamza & Hamza Law Associates need to be aware of these tax obligations and comply with legal requirements when managing their inheritance. This ensures smooth and tax-efficient asset transfers while avoiding any legal or financial complications.