Inheritance taxation covers the financial charges imposed on assets passed from one generation to another upon the death of a person. Inheritance tax, estate tax, and succession tax are terms commonly used for this levy to make wealth transfer become part of public goods, particularly in cases involving larger estates or substantial assets. The philosophy underlying inheritance taxation is one of equity and redistribution so that wealth is not kept in a few hands from generation to generation without contributing to the economy at large.
Different countries develop different approaches to the subject of inheritance taxation; some tax the whole estate of the deceased, while in some, individual beneficiaries are taxed on the basis of amounts they have inherited. Rates of taxation and exemptions often differ depending on the relationship between the deceased and the inheritor or the total value of the inheritance. Proponents maintain that inheritance tax serves equity in society and finances public services. Detractors point out that it is an impediment to the process of wealth creation and fails the test of equity by being a form of double taxation since the asset in question has, after all, already attracted taxation during the lifetime of the owner. Despite the opposing perspectives, the topic of inheritance taxation has continued to feature prominently in the larger debate on fiscal strategies, wealth transfer, and intergenerational equity.
What is Inheritance Tax?
The term “inheritance tax” denotes an estate duty levied on the transfer of an individual’s estate after his death to the heirs. The tax was introduced in India by way of the Inheritance Duty Act of 1953 with the purpose of placing a burden on the inheritance of the deceased before handing it to their rightful heirs, therefore taxing the aggregate estate of the deceased, movable, and immovable. The tax was to be paid by the legal heirs and beneficiaries, and the real intent behind imposing this tax was to redistribute wealth and diminish the concentration of wealth amongst a select few.
However, due to a number of reasons such as difficulties in administration, a meager amount of revenue being generated, and the adverse effects that estate duties were assumed to have on the process of wealth accumulation, the Government of India abolished estate duty in 1985. As such, in India, estate duty on inheritance has been abolished, and the smooth transfer of wealth from one generation to another has been allowed without direct taxation.
It must be mentioned that some indirect taxes are still applicable. If the inherited property generates any income like rental income, dividends, and capital gains, the heir becomes liable to taxation on that income as per the Income Tax Act 1961. Thus, India presently has a no-inheritance-tax policy, which puts her most distance away from several other rich nations.
Types of Inheritance Taxes
Having read this, India neither has a direct inheritance tax nor does it have estate duty at the moment. However, one should keep in mind all various types of inheritance taxes, whether historical or indirect, as they will affect an heir under the present tax regimes. There are mainly two types of these taxes: historical taxes (previously enforced) and indirect or associated taxes (now relevant).
1. Historical Inheritance Tax in India (abolished)
- Estate Duty (1953-1985): The Estate Duty Act of 1953 imposed a tax on the total value of an estate prior to it being allocated to heirs after a person’s death. It was progressive on a scale relative to the size of the estate. The heirs or legal representatives had to file returns and pay the estate duty before he or she could receive any property from the estate. It was abolished due to the low yield accruing from it, problems of valuation, and adverse public feelings toward it in 1985.
- Gift Tax (1958-1998): The Gift Tax Act of 1958 taxed contributions of movable and immovable property in the form of a gift, even those given during the instants of a person’s life, to avoid the estate duty. It was rescinded in 1998, and the provisions relating to it are now part of the Income Tax Act of 1961.
2. Current Inheritance Tax Provisions (Indirect Taxes)
There are no direct inheritance taxes per se in India, however, such taxes apply on much income or gains attaching to inherited assets.
- Income tax for derived assets derived from inheritance – In India, inheritance has no taxes. One’s income from inherited property, rent, interest, or dividends, is taxable under the Income Tax Act of 1961.
- Capital Gains Tax on Inherited Property – Long-term capital gains shall be computed adopting the original cost of acquisition as the actual purchase price at which the deceased acquired it, with indexation benefits allowed. This tax has quite often been attached to inherited obvious property, buildings, gold, stocks, and mutual funds.
- Stamp Duty and Registration Charges – Inheriting through a will or by succession does not attract stamp duty except for a small amount of stamp duty or registration fees that may be charged by certain states for property transfer, especially if a gift deed or relinquishment deed is executed by heirs.
- Gift taxation (only in certain scenarios) – Gifts of higher than ₹50,000 in value received without consideration are taxable income under Section 56(2)(x) of the Income Tax Act 1961 unless received from relatives or by inheritance (exempt). Gift inheritance is free from the taxable gift law; hence, heirs do not pay any taxes for inheriting property or money from a deceased relative.
Presently, India has a tax free regime for inheritance, but there are indirect taxes in the form of income, capital gains, and registration duties. An understanding of these will help individuals in managing their inherited wealth effectively. Periodically, there are calls in the debate for the introduction of inheritance or estate taxes on the grounds of equity and public finance, but no proposals have been put forward until now.
Applicability of Inheritance Tax
As of now, an inheritance tax or an estate duty exists in India, so wealth entering upon inheritance is deeded free of any liability to taxation upon transfer. However, inheritance taxation has been a subject matter in India and may still create tax implications under certain laws. To understand completely why the inheritance taxation system is relevant in India, one must view inheritance taxes in an overall historical context, along with present legal laws and other indirect taxation systems invoked in and after the process of inheritance.
1. Historical Context: Estate Duty (1953-1985)
- The Estate Duty Act, which came into force in 1953, provided for an inheritance tax regime in India.
- The estate tax was levied on both moveable and immovable properties.
- Estate duty was payable prior to the transfer of assets to the rightful heirs.
- The estate duty was repealed in 1985, due to administrative difficulties in working; negligible revenue generation; and public displeasure.
- Since then, India has followed a policy of tax-free inheritance.
2. Inheritance laws in India are personal succession statutes under the Hindu Succession Act of 1956, the Indian Succession Act of 1925, and the Muslim Personal Law (Shariat) Application Act of 1937. These laws, when determining inheritance rights, place religion and sex relevant above taxation.
3. Present day Applicability: Indirect Taxation on Inherited Assets
While there is no express inheritance tax, other taxes depending on the uses of the assets may potentially be attracted following the transfer of the asset:
a. Income Tax on Inherited Assets
- Inherited assets such as real estate, stocks, deposits in banks, or gold are not taxable at the point of inheritance.
- However, any income arising from these assets (such as rent income, interest income, or dividend income) is taxable to the heir under the Income Tax Act of 1961.
b. Tax on Capital Gains in Sale of Inherited Assets
- Capital gain tax is levied on the earnings which an heir realizes by selling a property inherited by him.
- The cost of acquisition shall be on the original value (purchase value) of the asset when it was acquired by the deceased.
- Long term capital assets can avail of the benefit of indexation for inflation, which becomes a major factor in post-inheritance taxation.
c. Stamp Duty and Registration Fee
- No stamp duty is payable on inheritance through a will or succession. However, stamp duties may attach to partition deeds, gift deeds, relinquishment deeds, etc., depending on the state laws. Some states may charge a nominal amount while some may charge prescribed rates based on either token value or full market value.
d. Gifts and Their Tax: Inheritance Exemption
- Persons receiving gifts exceeding ₹50,000 under clause 56(2)(of the x) Income Tax Act will be called to pay tax.
- Gifts given by inheritance or by will are exempt from the tax, irrespective of their value, a provision introduced to protect the inheritance from the gift tax law.
4. Future Considerations
Now, some policymakers are thinking about putting inheritance taxes or estate duties back into their portfolio of revenue sources, along with relying on the additional taxes to lessen wealth concentration. Such a policy has yet to be set forward by the government, likely because of misgivings over its administrative complexity, public outcry, and investment and capital formation effects.
No inheritance taxes in India place this country among just a few countries in the world that practice completely direct tax-free inheritance. There are, however, some indirect taxes that should be noted: income tax on the earning made after bequeath, capital gains tax on sale of wealth, and sometimes stamp duties, which can apply after the transfer of wealth. It is important to understand these complexities for a good estate plan, legal compliance, and wise financial management of inherited assets.
Calculation of Inheritance Tax
There are currently no inheritance taxes or estate duties in vogue in India; hence, a simple computation to tax inherited wealth does not arise in this instance. However, if inheritance taxes were to be reinstated, in general, the computation would require the assessment of the total market value of the deceased’s estate as of the date of the death of the deceased. Allowable deductions, if any, for debts, funeral expenditures, etc., or for exemptions to close relatives would be tracked. The value, net of these deductions, would then be taxed according to the prescribed tax brackets/rates, which are mostly progressive.
In the meantime, indirect taxes are probably levied under the evaluation of these properties:
- Selling inherited property gives rise to capital gains tax on the sale price minus the original purchase price, adjusted for inflation.
- Income tax applies to profits earned from inheriting assets.
So, whereas computations for inheritance tax are not done, taxes relevant to the computation are levied thereafter on income or sales of the assets after the inheritance.
Conclusion
India currently employs a tax-exempt inheritance system, meaning that wealth transferred from one generation to the next does not attract tax directly. Though estate duty was once in operation, it was abolished due to the levy being ineffective and having its share of practical problems. Direct tax, however, still applies indirectly as the inheritor has to pay capital gains tax and income tax on income drawn from any inherited land or property. The talk of increasing the lagging wealth redistribution avenues and economic fairness discusses a possible reintroduction of this levy. Hence, a deep understanding of the legal and tax implications of inherited assets is indispensable at this moment for effective estate planning and compliance with tax laws.
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