 "Inheritance tax")
Latching on to the comments made by Sam Pitroda on inheritance tax, Prime Minister Narendra Modi on Wednesday alleged that the opposition Congress was planning to take away properties left by people for their children.
On its part, the Congress has refuted any intention to introduce any such tax. Despite this, BJP leaders are in no mood to relent.
Amid this raging debate, we look back at history to understand the present. And also find out how some developed nations have adopted the inheritance tax.
The decades-old debate...
India implemented an inheritance tax, known as estate duty, in 1953. But it was abolished in 1985 by 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.
The use of inheritance tax as a tool for the redistribution of wealth to address income inequality has been discussed widely. In 2019, ahead of Union Finance Minister Nirmala Sitharaman’s first Budget speech, there was speculation about the potential reintroduction of the inheritance tax.
Jeffrey Owens, director at Vienna-based WU Global Tax Policy Center, suggested that “India needs to review the case for re-introducing an inheritance/estate tax with, ideally, relatively high thresholds, so it’s targeted at the very rich.”
What happens in India when a person with significant assets dies?
In India, there is currently no estate, inheritance, or generation-skipping taxes. When a person with significant assets dies, the assets, whether movable or immovable, are transferred to the legal heirs or nominees in accordance with the deceased’s will or in equal ratio if not specified.
“Estate duty was applicable under the Estate Duty Act of 1953 but was abolished in March 1985 due to its complexity and the high administrative costs it entailed, which were not justified by the revenue it generated. Estates valued over Rs 20 lakh were subject to a high duty rate of 85%. Despite heavy litigation, the revenue collected from estate duties was minimal, amounting to only Rs 20 crore for the financial year 1984-85, representing a mere 0.4% of the total direct tax collection that year,” explains Keshav Singhania, Private Client Leader at Singhania & Co. LLP.
What are the financial implications for heirs in India?
In India, where there is no inheritance tax, the financial implications for heirs are primarily governed by the income tax regime.
According to Singhania, “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.
Mohit Garg, managing partner at Lex Panacea, adds, “Beneficiaries are only required to pay tax 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.”
Will the Indian economy benefit if an inheritance tax were to be implemented?
“The introduction of an inheritance tax could appeal to those advocating for its use to mitigate wealth inequality and prevent wealth concentration,” suggests Singhania.
Such a tax would also help finance government social and economic initiatives and establish a robust social security framework.
Singhania adds, “By earmarking tax proceeds for public services and development projects, the government could enhance its efforts in addressing societal challenges and improve national well-being. The tax could foster a sense of social responsibility among the wealthy, promoting a culture of shared prosperity.”
“The tax rate would likely be progressive, aiming to reduce wealth disparities and provide equal opportunities across economic backgrounds,” Singhania explains.
Garg notes, “While potentially profitable for the government, the tax could burden families, possibly forcing heirs to sell inherited assets to cover tax liabilities. Careful planning is necessary, alongside laws to address benami transactions and ensure a fair implementation of inheritance law.”
Let us understand how inheritance tax is applied in the United States
In the United States, inheritance tax is enforced in six states: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.
The tax is determined by the state where the deceased lived, rather than where the beneficiary resides.
According to Garg, “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, typically over $1 million.”
“Iowa has recently passed legislation aiming to gradually eliminate its inheritance tax, with a complete phase-out planned for deaths occurring on or after 1st January 2025,” says Rubal Bansal Maini, Partner at Luthra and Luthra Law Offices India.
How does the US Estate Tax work?
The US estate tax is a federal tax imposed on the estate before distribution to the heirs. “It contrasts with the inheritance tax, which is paid by the beneficiary,” says Keshav Singhania.
“The Tax Cuts and Jobs Act of 2017 temporarily doubled the exemption limits for estate, gift, and generation-skipping transfer taxes from $5 million to $10 million--$12.92 million for 2023, adjusted for inflation. However, these limits are set to revert after December 31, 2025,” he said.
What factors affect asset taxation by the states in the US?
“Estate and Inheritance Tax is calculated based on the fair market value of all assets the deceased held at the time of death,” notes Manmeet Kaur, Partner at Karanjawala & Co. This valuation includes cash, securities, property, insurance, trusts, annuities, business interests, and other assets.
How do inheritance tax regulations vary globally?
Manmeet Kaur, Partner at Karanjawala & Co, notes that inheritance tax regulations significantly differ worldwide, with rates depending on the inheritance value and the beneficiary’s relationship with the deceased.
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, says Garg.
The UK bases its inheritance tax on the deceased’s domicile status, taxing the worldwide estate of those domiciled there.
The UK operates a cumulative system, consolidating gifts made within seven years that don't meet exemptions. It features a nil-rate band of GBP 325,000, unchanged until April 2026, and a main residence nil-rate band of GBP 175,000 for passing a residence to a direct descendant.
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.
In contrast, countries like Australia, Canada, China, and India currently do not impose any inheritance or estate taxes.
