Inheritance tax, often referred to as estate duty in India, was a tax imposed on the value of property passed on after the death of an individual. Read here to learn more.
The tax has a complex history, involving periods of implementation, abolition, and ongoing debates about its potential revival.
Here’s an overview of the inheritance tax in India, detailing its history, abolishment, and the discussions around its revival.
What is deceased estate and inheritance tax?
Often referred to as a deceased estate, it is made up of the assets and liabilities of the deceased.
- Usually, this estate consists of anything from real estate and assets to debts and personal items.
- However, depending on the local laws and whether the dead left a will, what happens to these assets and obligations might differ greatly.
- Managing and allocating these assets following the decedent’s desires or the rules of intestacy (if a will is absent) is the duty of the executor or administrator of the deceased, whom the decedent or the court may have chosen.
In contrast, inheritance tax is a charge placed on transferring assets from a deceased person to their heirs.
- It is often referred to as estate tax or death duty in certain jurisdictions.
- The relationship between the dead and the beneficiary, the entire worth of the estate, and the tax regulations of the jurisdiction can all affect the tax, which is normally based on the value of the transferred assets.
How is inheritance tax calculated?
The first step in dealing with a deceased estate is often to determine its total value.
- This involves assessing the value of all assets owned by the deceased, including real estate, investments, bank accounts, vehicles, and personal belongings, while also considering any outstanding debts or liabilities.
- Whether or not inheritance tax applies depends on several factors, including the total value of the estate and the laws of the jurisdiction.
- In some places, certain beneficiaries, such as spouses or children, may be exempt from paying inheritance tax or may receive a reduced tax rate.
History of Inheritance Tax in India
Implementation (1953):
- Inheritance tax was introduced in India in 1953 under the Estate Duty Act.
- The tax was imposed on the principal value of the estate that exceeded a certain amount, passing to beneficiaries after the death of an individual.
- The rates were progressive, depending on the relationship of the heir to the deceased and the value of the estate.
- The primary aim of introducing inheritance tax was to reduce wealth inequality and redistribute wealth. It was also seen as a measure to raise revenue for the government.
Abolishment (1985):
The tax was abolished in 1985 during the government of Prime Minister Rajiv Gandhi. The reasons for the abolition included:
- Administrative and enforcement challenges, lead to high costs and low efficiency.
- The tax was perceived as encouraging capital flight and discouraging investment, as wealthy individuals sought ways to avoid the tax through various means.
- It was also seen as contributing to tax evasion and encouraging the undervaluation of assets.
Impact:
- The abolition was welcomed by many as it was believed to encourage wealth creation and remove a layer of taxation that was deemed unfair by some, particularly those who viewed it as double taxation since the assets had often already been taxed during the lifetime of the deceased.
Revival Attempts and Current Debates
Economic Arguments for Revival:
In recent years, there have been calls from various quarters, including economists and policymakers, to reintroduce inheritance tax in India.
The arguments for its revival often include:
- Addressing the rising wealth inequality in India.
- Generating additional revenue for the government to fund social welfare programs.
- Aligning with global practices, many countries, including the United States and the United Kingdom, have some form of estate or inheritance tax.
Political and Public Response:
- The idea of reintroducing an inheritance tax is politically sensitive and has received mixed reactions.
- The notion of reintroducing an inheritance tax has been circulating within political spheres for over a decade.
- Critics argue that it could lead to capital flight, reduce incentives for savings and investment, and encourage tax evasion.
Proposals and Discussions:
- Discussions about the revival of inheritance tax often suggest modernizing the framework to prevent evasion, perhaps with lower rates and higher exemption thresholds than were previously in place.
- Proposals have varied, but there is no concrete legislative action as of now. The topic remains a point of debate among policymakers, particularly in the context of discussions about fiscal policy and economic reforms aimed at achieving greater social equity.
Why in the news?
Inheritance tax a duty on property inherited by a person – has become a polarising topic in the 2024 Lok Sabha campaign, with both Congress and BJP accusing the other of reviving it.
Inheritance tax in other nations
Inheritance taxes are widespread in nations like the UK, Japan, France, and Finland.
- With a striking 40 per cent rate, the US holds one of the highest inheritance tax rates.
- Japan tops the list with a 55 per cent rate, followed by South Korea at 50 per cent and France at 45 per cent.
United States
- The United States imposes a federal estate tax on the transfer of the estate of deceased persons.
- The maximum tax rate is 40%. Some states also impose their own estate or inheritance taxes.
- As of 2023, inheritance taxes are scarce, imposed only within Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.
- The taxation amount depends on factors like the inheritance’s value, the beneficiary’s relationship to the deceased, and the local legislation.
- Additionally, the state where the deceased lived or owned property may also impose an inheritance tax.
United Kingdom
- In the UK, inheritance tax is charged at 40% on estates above the threshold of £325,000.
- However, there are exemptions such as if you leave everything above the threshold to a spouse, civil partner, a charity, or a community amateur sports club, where the estate is tax-free.
- Additionally, there is a residence nil rate band when a residence is passed on to direct descendants.
Japan
- Japan has one of the highest inheritance tax rates in the world.
- The rates range from 10% to 55%, with the amount of tax levied depending on the relationship of the heir to the deceased and the value of the inheritance.
France
- France’s inheritance laws are quite stringent, with tax rates based on the relationship to the deceased.
- Direct descendants and spouses pay rates from 5% to 45%, while distant relatives or non-relatives can pay much higher rates.
Germany
- Germany charges inheritance tax on a scale based on the relationship to the deceased and the value of the inheritance.
- Tax rates range from 7% to 50%, with spouses and children typically enjoying higher allowances and lower rates.
Conclusion
The history of inheritance tax in India reflects broader economic and social policies and priorities. While it was originally instituted as a tool for wealth redistribution, its abolition was aimed at stimulating economic growth and investment.
The current debates about its potential revival hinge on balancing economic growth with social equity, demonstrating the complex interplay between fiscal policy and societal values in India.
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-Article by Swathi Satish
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