A Comprehensive Guide to Inheritance Tax and Its Impact

What is an inheritance tax?

Inheritance tax is a tax imposed on individuals who inherit money or property from a deceased person. The tax amount varies depending on the value of the inherited estate (property/assets) and the heir's relationship to the deceased. Typically, immediate family members may incur lower taxes compared to more distant relatives, depending on the regulations of the country.

Difference between estate duty/tax and inheritance tax

An estate tax is levied on the entire estate before it is distributed to the heirs, while an inheritance tax is paid by the heirs on the property they receive. Estate duty is applicable to the earner of the estate (assets) prior to death. In contrast, inheritance tax is the responsibility of the beneficiaries. The distinction lies in the amount on which the tax is levied and the individuals responsible for payment.

Is it double taxation?

No, inheritance tax is not considered double taxation. The amounts and individuals responsible for payment differ, making them distinct tax obligations.

Does India currently have an inheritance tax?

No, India does not have an inheritance tax at present. The Estate Duty Act was enacted in 1953, with rates ranging from 10% to 85%. However, it was abolished in 1985 due to administrative challenges, complexities, and extensive litigation.

Is it a type of gift tax?

Yes, inheritance tax can be viewed as a form of gift tax. However, in India, the gift tax under the Income Tax Act exempts inheritance and monetary gifts received during weddings.

Implications for heirs in India receiving an inheritance

In India, heirs do not face inheritance tax. The primary tax responsibility involves income tax, which may apply if inherited assets generate income, or capital gains tax if the assets are sold.

Discussions about reintroducing inheritance tax in India

There have been ongoing discussions and speculations regarding the potential reintroduction of inheritance tax in India, particularly around budget times, to tackle wealth inequality.

How do inheritance taxes work in other countries?

Inheritance tax systems vary globally. For example, the United States imposes an estate tax at the federal level and an inheritance tax in certain states. European nations like the UK and France enforce significant inheritance taxes, particularly targeting larger estates and non-direct family members such as nominees.

Effects of inheritance taxes on wealth distribution

Inheritance taxes serve as a mechanism for wealth redistribution, aiming to diminish wealth concentration among the affluent. This practice promotes social equity and funds public services.

Exemptions in inheritance taxes

Numerous countries offer exemptions in inheritance taxes based on the relationship between the deceased and the beneficiary, as well as the value of the inheritance. These exemptions and tax rates can vary significantly from one country to another.

Valuation of assets for inheritance taxes

Assets are typically valued based on their fair market value at the time of the deceased’s death. This valuation encompasses both tangible and intangible assets, including cash, property, investments, and other personal belongings.

Arguments for and against inheritance tax

• Proponents argue:
  • The growing inequality hampers economic growth and political stability.
  • Inheritance tax facilitates wealth redistribution, benefitting the less privileged.
  • Inheritors of significant wealth often lead opulent lives without merit.
  • The Indian Constitution affirms the right to equality (Art.38), supporting this tax's introduction.
  • Reducing indirect taxes could benefit middle and lower-income groups.
  • Reviving this tax could alleviate tax burdens on the less privileged in India.
  • Direct taxes like inheritance can foster greater investment in human development.
  • Tax proceeds shared with states may help reduce horizontal fiscal imbalances.
• Opponents argue:
  • Taxes have already been paid on the property.
  • Family contributions make inheritance a collective effort.
  • It may act as a disincentive for wealth accumulation.
  • Funds could potentially be redirected to tax havens and crypto assets.

Constitutionality of inheritance tax in India

In the Union List, Entry 82 pertains to income tax. Various forms of taxation, including gift tax, corporate tax, inheritance tax, estate tax, and wealth tax, fall under the income tax category. This tax is imposed by the Union Government and is shared with states based on Finance Commission recommendations.