What Is Inheritance Tax & What Are Its Implications?

Suppose you need to pay a new type of tax on inherited properties that was already abolished 40 years ago… How would you feel? Not very delighted! Well, that’s a similar situation among Indians. Most of them are scratching their heads about what is inheritance tax, whether will it be implemented in the future or gulp up their finances, etc.

If you are one of them, then stick to this article because here we will not only uncover what is inheritance tax but also dive into its implications.

Story So Far

Recently, Sam Pitroda’s (the Indian Overseas Congress Chairman) comment on inheritance tax stirred up a heated debate in India. Reason?

He compared the situation of the Indian inheritance system with that of Americans.

Here’s the deal- In America, when someone passes away with, let’s say, $100 million, their kids can only pocket about 45% of it. The government takes the rest, around 55%. It’s like saying, “Hey, you earned it, but let’s share some with the community when you’re gone.” Fair, right?

Here is what he said- “In India, we don’t have that. If someone has assets worth 10 billion and passes away, their children get the entire amount, and the public doesn’t get anything in return… These are the kinds of topics we should be talking about. When we discuss redistributing wealth, we’re considering new policies and initiatives that benefit everyone, not just the ultra-rich.”

Facing some heat from Bharatiya Janata Party leaders, Pitroda clarified that his comments were his personal views.

“I just mentioned the US inheritance tax during a casual TV chat. Can’t I bring up factual info?” Pitroda posted on X.

This is the point where things get interesting. How? Go through the next sections and you’ll find out!

What is inheritance tax?

Inheritance tax is defined as “ A  levy imposed by the government on the total value of a deceased individual’s estate, including money, property, and other assets, before its distribution to the designated beneficiaries or legal heirs.”

Sounds complicated? Let me explain it in simpler terms!

Inheritance tax, also called estate tax, is like a fee that’s charged on the money and property someone leaves behind when they pass away. 

Imagine you have a rich aunt who owns a big house, some land, and a pile of money. When she passes away, the government might take a small portion of all that stuff before giving it to her kids or other family members. They do this to collect some money for public services, like fixing roads or running schools, and also to make sure wealth is spread out fairly in society. 

So, inheritance tax is a way for the government to get a little bit of money from someone’s belongings after they’re gone, to help out everyone in the community.

Global Inheritance Tax Landscape

In different countries around the world, inheritance tax rates vary, shaping how wealth is passed down from one generation to the next. 

Here is the data taken from authentic reports–

These varying rates reflect each country’s approach to managing wealth distribution and taxation. Inheritance tax isn’t just about collecting revenue; it’s also about ensuring fairness and equity in how wealth is transferred between generations. These tax policies influence decisions families make about passing on assets and can shape broader economic and social welfare systems.

Inheritance Tax in India

Surprisingly, the inheritance tax rate in India is 0%! Yes, you don’t need to pay any tax while inheriting any property from your relatives. But why? You may wonder. Well, that’s a long story that we’ll explain in the next section.

Reasons for the Inheritance Tax abolition in India in 1985

In India, there is currently no tax on inheritance. But, India had a tax called estate duty, also known as inheritance tax, starting from 1953. However, Rajiv Gandhi’s government got rid of it in 1985. India used to have other taxes like wealth tax and gift tax too. But these were scrapped in 2015 and 1998, respectively.

Below are the reasons for the abolition of the Inheritance tax in India-

• Economic Growth Encouragement: The primary reason for abolishing the inheritance tax in India in 1985 was to stimulate economic growth. The government believed that removing this tax could encourage investment and entrepreneurship, leading to increased economic activity and prosperity.
• Administrative Burden Reduction: Another factor was the administrative burden associated with collecting and enforcing inheritance tax. The process of valuing assets, determining tax liabilities, and ensuring compliance was deemed complex and resource-intensive.Despite taxing estates valued over Rs.20 lakh at a high rate of 85%, the revenue collected was minimal compared to the administrative costs.  Abolishing the tax-relieved both individuals and the government of this administrative burden.
• Wealth Preservation: Abolishing inheritance tax also aimed to facilitate the preservation and transfer of family wealth. Families could pass down assets to future generations without facing substantial tax liabilities, thereby safeguarding their financial legacies.
• Encouraging Entrepreneurship: A crucial factor behind the decision was to foster entrepreneurship and wealth creation. By eliminating inheritance tax, the government hoped to incentivize individuals to start and expand businesses without the fear of heavy taxation on their assets passed down to future generations.
• Competitive Advantage: India’s decision to abolish inheritance tax was also influenced by global trends. Many countries were either reducing or eliminating similar taxes to attract investment and remain competitive in the global economy. India’s move aligned with this trend, positioning it as an attractive destination for investment and wealth management.

Thus, the decision to abolish the inheritance tax in 1985 was driven by a desire to stimulate economic activity, simplify the tax system, and support entrepreneurship, while also considering the social and administrative challenges associated with its implementation.

Current Scenario: Financial Implications for heirs in India

So, in India, when someone passes away and leaves behind money or property, their loved ones—those who inherit these things—don’t have to worry about paying a specific inheritance tax. That’s a relief, right?

Now, when it comes to the nitty-gritty of taxes, here’s the deal- If you get money or property through a gift, a will, or a trust that can’t be changed, you generally won’t have to pay taxes on it under certain parts of the Income Tax Act. That means you can breathe a bit easier knowing that you won’t be hit with unexpected tax bills.

And guess what? 

If you inherit property because there’s no will (we call that intestate succession), you usually don’t have to pay stamp duty on it. Stamp duty is a fee you pay when certain legal documents, like property transfers, are registered.

But here’s the thing to remember- If there’s any unpaid income tax on the stuff you inherit, or if you decide to sell something you’ve inherited and make a profit, you might need to pay some taxes on that. Also, if the inherited stuff makes regular money, like rent from a property, you might owe taxes on that too.

So, while inheriting in India might seem straightforward without an inheritance tax, it’s still good to keep an eye out for possible tax obligations on the income you receive from what you inherit.

Future Outlook: Implications of Inheritance Tax in India

Have you ever wondered what will happen if the government imposes an inheritance tax in India? Well, it will lead to tons of benefits and challenges. So, in this section, we will discuss the overall implications of inheritance tax in India.

Benefits of Implementing Inheritance Tax

• Wealth Redistribution: Inheritance tax helps spread out wealth more evenly among people. When someone inherits a lot of money or property, a portion of it is taxed before they get it. This means that instead of a few super-rich folks having most of the money, more people can benefit from it. The government can then use the tax money collected to help everyone through things like social welfare programs, building better roads, and other public projects.
• Promoting Social Responsibility: When wealthy individuals pay inheritance tax, they’re contributing back to society. It’s like giving back a bit of what they’ve received. This tax encourages them to think about the broader community and share some of their wealth to support public services and help those who might not have as much.
• Addressing Income Inequality: India has been seeing a big gap between the rich and the rest of the population. Inheritance tax helps tackle this by making sure that wealth doesn’t stay concentrated in just a few families over generations. This means more people have a fair chance to move up economically instead of wealth always staying in the same hands.
• Financing Government Initiatives: The money collected from inheritance tax can give the government extra funds to use for important things like schools, hospitals, and improving infrastructure. It’s like adding another stream of income for the government to tap into, which can help make sure there’s enough money to run the country smoothly.

Note: We have also explained the topic “What is the Foreign Remittance Tax & How to reduce it?” Visit the article for detailed information.

Challenges of Re-Implementing Inheritance Tax

• Historical Complexity: In the past, India did have an inheritance tax, called the estate duty, starting way back in 1953. But guess what? It didn’t stick around for long. It got scrapped in 1985 because it was just too complicated and expensive to manage. The law was tangled up in lots of legal battles, and even though it was supposed to bring in money for the government, the amount collected wasn’t worth all the hassle.
• Double Taxation Concerns: Imagine you already paid one tax on your stuff, and then, bam, another tax comes along on the same things! That’s what folks are worried about with inheritance tax. Back when we had the estate duty, people were also paying something called wealth tax on their assets. This double-double taxation doesn’t sit well with anyone.
• Operational Hurdles: Now, here’s a tricky part. Bringing back inheritance tax could be a logistical nightmare. Why? Well, for starters, there’s not enough good info out there about who owns what. Without accurate records of all the real stuff people own, like land and houses, it’s tough to figure out who should be paying what. And you can bet some folks might try to dodge paying if they think they can get away with it.
• Political Pushback:  Let’s not forget the politics involved. Some political parties might not be too keen on bringing back inheritance tax. Why? Well, it could be because they’ve got different ideas about taxes or because they’re worried about how voters will react. Remember the big fuss during the last election? Yeah, this topic can get folks fired up real quick.

In short, while inheritance tax might sound like a good idea on paper, there are plenty of hurdles to clear before it can become a reality again in India.

Way Forward

In the above section, you saw that the implementation of inheritance tax in India has more challenges than benefits. So, what can be done instead? You may wonder.

Moving forward, we can reintroduce inheritance tax in India but with a twist. Here’s how-

Instead of burdening everyone, we’ll set high thresholds, targeting only the super-wealthy. This ensures fairness without affecting regular folks. By spreading awareness about its benefits and dispelling misconceptions, we can gain public support for this tax. 

And let’s not rush into it; gradual implementation allows time for adjustment, avoiding any sudden shocks to the economy. 

Ultimately, this approach can promote equity, fund essential services, and address historical challenges, paving the way for a fairer system in India.

Thanks for taking the time to read through… I’d love to hear your thoughts in the comments below!