Inheritance tax in India: Is it applicable today?

Have you read the latest news about inheritance tax in India? There’s quite a long debate going on about it. But what is this inheritance tax all about? Is it applicable in India? Let’s go through the details in today’s article, and also understand what the current debate is about!

What is an inheritance tax?

Inheritance is the process of legal heirs inheriting assets from the deceased. The tax levied on such inherited assets (property, other tangible assets, cash, etc) is called inheritance tax.

Various countries levy the inheritance tax on such inherited assets. However, this tax is no longer applicable in India.

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History 

The inheritance tax was called estate duty in India and was introduced in the colonial era. It was introduced through the Indian Estate Duty Act of 1918. Being the first legislation imposing estate duty, the idea of inheritance tax was to collect taxes on properties of wealthy individuals after their death.

Levying of estate duty continued for close to seven decades. However, it was constantly criticised for discouraging investments and entrepreneurship. So, the government gradually reduced the rates on such properties. Eventually, the government abolished Estate Duty in India in April 1985. The idea here was to simplify the tax system and encourage savings and investments, which was significant for India’s growth.

Since April 1985, there has been no reintroduction of inheritance tax or estate duty. However, some indirect taxes like capital gains tax and stamp duty are applicable on inherited properties, similar to the taxes applicable on self-acquired properties.

What are the current rules about inheritance tax in India?

Have you heard of Gift Tax in India? While the term ‘Gift Tax’ is irrelevant in India today, gifts exceeding the value of ₹50,000 received without consideration are taxable as per the Income Tax Act. Such gifts are taxable under “Income from other sources”. The taxpayer’s income tax slab rate applies to this, too.

Ideally, inherited properties are gifts, too, since the heir receives them without paying consideration. However, such inherited assets are an exception to the concept of gifts and are not taxable under the Income Tax Act.

While there is no gift tax or inheritance tax on properties, there are some taxes levied on them if they fall under the following circumstances:

• Where the property is let out on rent: If the legal heir earns rent from the inherited property, such rent is taxable, as per the Income Tax Act under “Income from Other Sources”.  
• When the property is sold: When the legal heir sells the inherited property, capital gains are earned, on which capital gains tax is applicable. The sale value is liable for long-term or short-term capital gains, depending on the number of years that the heir owned the property.

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The latest news on inheritance tax

The popular political parties in the country have different views on inheritance tax, and there has been an ongoing debate about the Act’s reintroduction for some time now.

While one of the parties is voting for reintroducing the Act again, another party is thoroughly against it. The latter believes that heavy taxes like estate duty are harsh on the middle class and will affect their daily lives. 

As of today, the non-applicability of estate duty continues in India. Whether or not it will be applicable again is uncertain, so let’s wait and watch!

Bottomline

Inheritance tax is the tax levied on properties of the deceased, inherited by their legal heirs. While this tax is not applicable in India, various countries globally apply the inheritance tax.

Since its abolishment in 1985, there have been multiple attempts to reintroduce the tax. While it does increase the burden on the taxpayers, such taxes also help in the equal distribution of wealth However, the lack of consensus between powerful political parties in the country is causing such gaps.

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