To Tax or NOT to Tax the Inheritance in India

Inheritance tax is a levy on assets inherited from a deceased person. It is paid by the beneficiary. In many countries, when the property or assets of a deceased person get passed on to their legal heirs like children, siblings, spouse, etc. a tax is levied on the value of the property.

India implemented an inheritance tax, known as estate duty, in 1953 but it was abolished in 1985 by Shri. Rajiv Gandhi’s government. India also previously had a wealth tax and a gift tax, which were done away with in 2015 and 1998, respectively.

Thus, since there is no inheritance tax, the financial implications for heirs are primarily governed by the income tax regime where in “Transfers of assets under a gift, will, or irrevocable trust are not considered transfers for tax purposes under sub-clause (iii) of Section 47 of the Income Tax Act. Additionally, no stamp duty is required for property inherited through intestate succession, nor on the registration of a Will.”

The only way the beneficiary is required to pay tax is if there is any outstanding income tax liability on the assets of the deceased, if the beneficiary decides to sell the inherited asset, or if there is any regular income generated from an inherited asset.

?Inheritance tax: Global Scenario

In the United States, inheritance tax is enforced in six states: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania wherein the tax is determined by the state where the deceased lived, rather than where the beneficiary resides.

The tax rates and exemptions vary from state to state. Some states offer exemptions for close family members or apply lower rates, but the tax is only levied on assets exceeding certain thresholds, mostly over $1 million.

In France, rates vary between 5% to 60%, with higher rates applied if the beneficiary is not a direct family member like a child or sibling.

The UK bases its inheritance tax on the deceased’s domicile status, taxing the worldwide estate of those domiciled there.

Japan’s rates range from 10% to 70%. Japan’s Inheritance Tax Law includes both inheritance and gift taxes, levied on the total value of inheritable assets, minus exemptions, and is applied directly to the heirs.

Belgium has one of the highest rates at 80%, South Korea at 50%, and Spain varies from 7.65% to 34%.

Germany’s inheritance and gift tax is applied based on the transferee’s benefit rather than the estate value, with exemptions varying by the heir’s relationship and asset type.

Singapore abolished fixed duty for most property distributions from a deceased’s estate after 19 February 2011, but a fixed stamp duty of SGD10 applies if properties are distributed according to the deceased’s will or laws of intestacy.

Should India Re-introduce the Inheritance Tax??

While many may argue that it may be only levied on the Super Rich and may reduce inequality, Dispersion of wealth, help in Creation of meritocratic society, Utilitarian economics but there are also many who argue that India is a developing country and still has a long way to go to become a developed economy. At the current juncture, we need to keep incentivizing entrepreneurial spirit so that more private investment happens, leading to employment and allied opportunities.

Such a tax might result in the exodus of the high net worth individual to countries without this tax. These rich individuals will not only take their money out of India but also their entrepreneurial skills which India needs so much when it aims to consistently grow at higher rates.

Can the Inheritance Tax be dodged?

It is not difficult to dodge the inheritance tax. When in 2017 the buzz about reimposition of inheritance tax started, the rich started devising novel methods to dodge the tax. One such method is forming a family trust which insulates their assets. Family trusts would fall outside the scope of inheritance tax if it were introduced because there is no transfer in ownership of assets, only a change in the trust shareholding.