All About Inheritance Tax In India

In 1985, the Inheritance Tax stood abolished. However later last year, discussions around this tax making a comeback started although there has been no formal announcement. Also known as the Estate Tax, it is usually levied upon the High Net-Worth Individuals (HNIs) .

Here is a look at what it means:

Inheritance Tax

This is a tax levied upon the assets that an HNI has inherited and the rate depends upon the value of these assets. Do note that inheritance tax is not levied on the property but the income generated from it. Therefore, rent or capital gains, etc., are taken into consideration. If the assets are divided among legal heirs, all these heirs are taxed as per the justifiable proportion. For the basis of calculation, the Income Tax returns that are filed are taken into account. The income from these assets has to be mandatorily disclosed.

Jewellery, vehicles, etc., of more than Rs 50,000, received as inheritance, is also taxed. Earlier this tax was shelved in 1985, the tax rate varied between 7.5-40 per cent on the principal value of the estate. However, the highest slab was 85 per cent. There were rules in place – if the assets were handed over two years before the ancestor’s death, no tax was applicable. Similarly, revenue borne out of assets of a deceased spouse wasn’t taxed either. 

For those who wish to transfer their inheritance outside India, the tax policy of that country will apply.

Whom does it apply to?

According to the Hindu Succession Act, Hindus, Jains, Sikhs and Buddhists can inherit based on the succession rules. For Muslims, they can only do away with one-third of their assets to whomsoever they wish, the rest is divided equally among heirs. For Christians and Parsis or mixed origin couples, one-third property is for spouse (in case there aren’t any children) while the rest is for parents and surviving parents.

In case, the individual transfer his/her inheritance outside India, rule or taxation policy of that country will need to be followed.

Who is exempted?

Sharia Law states that non-practising Muslims, murderers, unborn children, children born out of wedlock, step-parents cannot inherit and, therefore, will not be liable for inheritance tax. Also, citizens of Pakistan, Bangladesh, China, Iran, Nepal, Bhutan, Sri Lanka and Afghanistan cannot inherit property in India. In exceptional cases, the Reserve Bank of India (RBI) can consider cases.

Why is it doing the rounds now?

In 2014, the Ministry of Finance had planned to bring back the inheritance tax but Arun Jaitley had opposed the move. It was recently reported that in order to fill up the government coffers, the tax may be reintroduced in one or the other form. Experts feel that it may be good for the financial health of the country given that the top one per cent wealthy Indians own almost 58 per cent of the total wealth. An Oxfam study estimated that worldwide, 500 people may hand over $2.1 trillion to their heirs over the next two decades. They also believe that given that it is money generated from unearned income, it shouldn’t be a disincentive either.

While there has been no formal announcement yet, inheritance tax and its impact is debatable given that being a forced redistribution of their wealth in the name of equality is not taken very well. Some others feel that in a measured way, this may work just as in other countries.

Global inheritance tax structure

In Japan the peak inheritance tax rate is 55 per cent closely followed by South Korea (50 per cent) , France (45 per cent) , United Kingdom (40 per cent) , United States (40 per cent) , Spain (34 per cent) , Ireland (33 per cent) , Belgium and Germany (30 per cent) and Chile (25 per cent) .

Australia, Austria, Canada, New Zealand and some others, like India, do not have inheritance tax.