Recently, Prime Minister Narendra Modi brought up the topic of inheritance tax, sparking a heated debate in India. While the opposition Congress party denied any plans to introduce such a tax, the discussion has made many wonder about the history and implications of inheritance tax, both in India and around the globe.
A Brief History of Inheritance Tax in India
India had an inheritance tax, known as estate duty, from 1953 until 1985. This tax was abolished by the government led by Rajiv Gandhi due to its complexity and the high costs of administration. The revenue generated by this tax was minimal, contributing only 0.4% to the total direct tax collection in its final year. Since then, India has also eliminated the wealth tax and gift tax.
Today, when someone with significant assets dies in India, these assets are transferred to their legal heirs or nominees according to the deceased’s will. If there is no will, the assets are distributed equally among the heirs. This process is relatively straightforward as there are no estate, inheritance, or generation-skipping taxes.
The Financial Implications for Heirs in India
Currently, heirs in India do not face an inheritance tax. The transfer of assets under a gift, will, or irrevocable trust is not considered a taxable event under the Income Tax Act, 1961. Additionally, no stamp duty is required for property inherited through intestate succession or the registration of a will.
However, heirs might have to pay taxes if there is any outstanding income tax liability on the inherited assets, if they decide to sell the inherited property, or if the inherited asset generates regular income. For example, if a commercial property generates rental income, the new owner (the heir) must declare this income and pay the corresponding taxes.
For instance, consider Mr. Ram, who owns a commercial complex and earns Rs. 60,000 per month in rent. Upon his death, the property is inherited by his son, Shyam. The transfer itself is not taxable, but Shyam must declare the Rs. 60,000 monthly rental income and pay taxes on it.
If the heir decides to sell the inherited property, they must also account for capital gains tax. The holding period for determining long-term or short-term capital gains includes the time the property was held by both the deceased and the heir. For example, if Mr. A inherited property from his father in 2017, and the property was originally purchased in 1997 and sold in 2022, the capital gain is classified as long-term. This allows Mr. A to benefit from indexation when calculating the taxable gain.
Would an Inheritance Tax Benefit India?
The idea of reintroducing inheritance tax in India is seen by some as a way to address wealth inequality and generate revenue for government initiatives. A recent report indicates that 58% of India’s total wealth belongs to the wealthiest 1% of the population, highlighting a significant economic gap. Advocates suggest that a well-structured inheritance tax, with high thresholds targeting only the very rich, could help finance social and economic programs, promoting a more equitable society.
However, implementing such a tax could also create financial burdens for families, potentially forcing them to sell inherited assets to pay the tax. Effective planning and legislation would be needed to ensure fairness and prevent issues such as benami transactions (where property is held by one person for the benefit of another). Moreover, many Indian businesses are family-run, and an inheritance tax could discourage economic growth if business owners move their operations abroad to avoid taxation. Some argue that taxing inherited assets, for which the deceased has already paid income and wealth taxes, would result in double taxation.
Calculating Inheritance Tax
To calculate inheritance tax, the first step is to determine the total market value of all assets owned by the deceased at the time of their death. This includes real estate, investments, bank balances, vehicles, and personal belongings. After subtracting liabilities from the total asset value, the net value of the estate is determined. The inheritance tax rate is then applied to this net value. Some jurisdictions offer thresholds or allowances that exempt a portion of the estate from taxation, or apply progressive rates based on the estate’s value.
Tax planning strategies, such as gifting assets during the deceased’s lifetime or setting up trusts, can be used to legally minimize the inheritance tax burden.
Conclusion
The debate over inheritance tax in India highlights important questions about wealth distribution and economic policy. While the reintroduction of such a tax could address wealth inequality and support government programs, it would require careful consideration to balance the potential benefits against the financial burdens it might place on families.
Nevertheless, such kind of news circulates every few years, causing panic among the public. While the probability of this tax being reinstated is low, but if it’s done, the government and policymakers would need to thoughtfully plan and implement such a tax to ensure it promotes fairness and economic balance without affecting growth. In fact, understanding the history, current regulations, and potential effects can help in making balanced decisions that aim to foster a more equitable and prosperous society.
