What is Inheritance Tax? Everything You Need to Know About

What is Inheritance Tax?

Inheritance tax, also called estate tax, is a levy imposed on the entirety of a deceased individual’s money and property before it is passed on to their rightful heirs. Generally, this tax is determined by assessing the value of the assets remaining after certain exemptions or deductions. The primary aim of inheritance tax is to generate government revenue and promote wealth redistribution.

History of Inheritance Tax in India

Introduced in 1953 under the Estate Duty Act, this measure aimed to reduce economic inequality.

• Rates for estate duty were progressive, reaching up to 85% for estates exceeding Rs 20 lakh.
• It applied to the market value of all immovable properties in India and movable assets, both within and outside India, transferred to successors upon an individual’s death.
• The law included measures to prevent certain transactions like gifts made before death or within two years before it.
• Despite its good intentions, the estate duty law faced criticism due to its complexity, leading to higher legal battles and administrative expenses.
• There were concerns about double taxation on assets with estate duty and wealth tax (now abolished since FY16).
• Moreover, estate duty collections were lower due to illegal concealment and the ownership of benami properties.

Current Status of Inheritance Tax in India

• In India, inheritance can occur through a Will or according to the deceased’s personal law. Inheritance falls under direct taxation.
• As of now, India does not have an inheritance tax. The Inheritance or Estate Tax was removed in 1985.
• When an individual passes away, their properties transfer to legal heirs without any exchange of money, which could be seen as a gift for income tax purposes.
• The Income Tax Act of 1961 excludes asset transfers via wills or inheritance from gift tax obligations.

Inheritance Tax across the World

• Japan has one of the highest inheritance tax rates globally, at 55%.
• South Korea follows closely with a rate of 50%.
• France imposes a rate of 45%.
• While both the United Kingdom and the United States have rates of 40%.

These rates demonstrate different countries’ strategies for managing wealth distribution and taxation. Inheritance tax plays a crucial role in shaping economic policies and social welfare systems by affecting decisions regarding wealth transfer and intergenerational equity.

Arguments in Favour

Supporters of inheritance tax point to these benefits:

• Reduces wealth inequality: It helps redistribute wealth from the very rich to society as a whole.
• Increases government revenue: Inheritance tax can be a significant source of income for governments.
• Discourages excessive wealth concentration: It prevents a small number of families from holding onto vast amounts of wealth for generations.

Arguments Against

There are arguments against inheritance tax:

• Discourages investment and entrepreneurship: Some argue it disincentivizes wealth creation and discourages passing on successful businesses to heirs.
• Burdens family businesses: It can create a financial burden on family-owned businesses that need to pay the tax to inherit the business.
• Administrative complexity: Implementing and administering the tax can be complex.

The debate over inheritance tax centers on how to balance these potential benefits and drawbacks.

Gift Tax in India

India does not currently have a separate Gift Tax. The concept of Gift Tax existed until 1998 under the Gift Tax Act, 1958. However, it was abolished and replaced with a system where gifts are taxed under the income tax provisions.

Here’s a breakdown of how gifts are treated in India’s tax system:

• Exempt Gifts:
  • Gifts up to Rs. 50,000 per financial year are exempt from tax.
  • Gifts received from specified relatives are exempt regardless of the amount. These relatives include spouses, siblings, parents, grandparents, children, grandchildren, uncles, aunts, nieces, nephews, etc.
• Taxable Gifts:
  • Any gift exceeding Rs. 50,000 in a year from someone other than a specified relative is considered income and taxed under the head “Income from Other Sources” at the recipient’s income tax slab rate.
  • Even gifts below Rs. 50,000 from non-relatives need to be clubbed together if the total value from the same source in a year exceeds Rs. 50,000, and the entire amount becomes taxable.

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FAQs: Inheritance Tax in India