Inheritance Tax

What is Inheritance Tax?

Inheritance tax is a tax paid by the beneficiaries who inherit property or assets from someone who has passed away. It is different from estate tax, which is paid by the deceased’s estate before assets are distributed.

In India, inheritance tax existed under the Estate Duty Act of 1953 but was abolished in 1985 due to its complexity and the low revenue it generated​.

However, any income generated from inherited assets, such as rent, dividends, or capital gains, is taxable under regular income tax laws and can be calculated using an Income Tax Calculator. 

Current Scenario of Tax on Inheritance in India in 2024

• No Inheritance Tax: Currently, India does not have an inheritance tax. When a person dies, their assets are transferred to heirs without any tax on the inheritance itself​.

• Other Applicable Taxes:

  • Capital Gains Tax: If the inherited property or assets are sold, the beneficiary may have to pay capital gains tax on the appreciation of the asset since it was acquired by the deceased​.

  • Income Tax: Any income generated from inherited assets, such as rent from property or interest on deposits, is taxable.

Tax on Income From Inheritance

In India, while there is no inheritance tax, any income earned from inherited assets is taxable. For Example, let us say you inherit a house from your father. The inheritance itself is not taxed, meaning you do not have to pay any tax just for receiving the house.

However, if you later decide to rent out the house and earn ₹3,00,000 annually from rent, that rental income will be added to your total income and taxed according to your income tax slab.

 However, the inheritance itself (the act of receiving the asset) is not taxed.

Tax on Sale of Inherited Property

In India, there is no tax on inheriting property, but you have to pay capital gains tax when selling it. The tax is based on the original purchase price or the property's value as of April 1, 2001, if bought before that date.

For Example, if you sell the house inherited from your father after a few years, the profit (capital gain) from the sale will also be taxed under capital gains tax, depending on how long you held the property before selling. For instance:

• If you sell the house within 2 years of inheriting it, it is considered a short-term capital gain and will be taxed at your regular income tax rate.

• If you sell it after 2 years, it is considered a long-term capital gain and will be taxed at 20% after indexation benefits.

Additionally, deductions can be claimed under Sections 54 and 54EC for reinvestment in residential property or specified bonds, reducing the tax liability.

Why is Inheritance Tax Being Discussed in 2024?

With rising wealth inequality in India, there is a renewed call for reintroducing inheritance tax. Those who favour this tax argue that taxing large inheritances could help reduce the concentration of wealth among the ultra-rich and generate revenue for public welfare​.

Key reasons include:

• Wealth Inequality: The top 1% of India's population holds over 77% of the country's wealth​. An inheritance tax could help redistribute this wealth.

• Revenue for Social Welfare: The revenue from inheritance tax could be used for social programs such as education, healthcare, and poverty alleviation.

Pros and Cons of Inheritance Tax in India

If India decides to bring back the inheritance tax, the following factors will need to be considered:

1. Pros:

   • Reduce Wealth Inequality: A progressive inheritance tax could help reduce the gap between the rich and the poor by redistributing wealth​.

   • Revenue Generation: It could provide additional funds for government social welfare programs like healthcare and education​.

2. Cons:

   • Potential Burden on Families: Heirs might face financial difficulties, especially if they are forced to sell inherited assets to pay the tax​.

   • Tax Evasion: Wealthy individuals may try to evade taxes by moving their assets to tax-friendly jurisdictions​.

How Tax on Inheritance is Calculated in India?

India levied an estate duty on the inheritance property before 1985, which was calculated as follows:

• Estate Duty was levied on the total value of a deceased person's assets passed to heirs.

• The tax rate was progressive, meaning higher estate values faced higher tax rates.

• Various exemptions and deductions were available to reduce the taxable estate.

• Estate Duty applied to assets like property, jewelry, and other valuables.

• The tax was calculated after deducting liabilities and expenses related to the estate.

• Estate Duty was abolished in 1985, removing inheritance tax in India.

Wrapping It Up

While India does not currently have an inheritance tax, the idea of bringing it back is gaining attention due to rising wealth inequality. India could learn from the experiences of other countries that have successfully implemented inheritance taxes. If the tax is introduced with high thresholds and appropriate exemptions, it could achieve its goals without adversely affecting the general population.