Updated Mar 24, 2022

What is inheritance tax in India?

What is inheritance tax in India?

Inheritance tax in India

Inheritance tax refers to the tax levied on an asset at the time of the inheritance of that asset. It is also called estate duty or estate tax. There are many countries worldwide that follow the law of paying Inheritance tax after one becomes the legal heir of an asset, but no such provision exists in India. The inheritance tax was first introduced in 1953 under the Estate Duty Act of 1953 to reduce economic disparity.

Even when it was clear that the inheritance tax act was promising objective welfare, it was not much appreciated and was disapproved. The act was seen as too complex and understood as leading to more administrative costs. There were cases all over India where the legal properties were slowly being inherited illegally to escape from the inheritance tax leading to illegal concealment of properties.

Because of the reasons mentioned above, the inheritance tax act was finally scrapped in 1985, and the provision of inheritance tax thus no longer exists in India, which means that an individual, when acquiring property as inheritance or being the legal heir of an asset, no longer has to pay tax on that inheritance.

There was an attempt in 1989 to revive the inheritance tax act as the Wealth (Inheritance) Duty Bill, 1989, which focused on getting tax on the property that an individual inherited. This time, it was seen as a better version of the previous one, making it more feasible and practical. The tax rate was taken as moderate at ten per cent (the highest rate of tax), so the act was believed to be different this time. But the Parliament dissolved in the same year, and the bill became a ghost and thus never returned even for discussion.

Tax on Inheritance Income

Although there are no provisions for taxing inherited property, this law was in practice only from 1953 to 1985. The Income Tax Act 1961 does not consider the inheritance tax as gift tax. However, if the inherited property is used to gain income, then the income earned from the inherited property comes under the taxable category.

If the inherited property is set to sell, then the money earned by selling it is taxable. When there are different heirs of one same property, and all of them inherit it, then the tax levied on the sale of that property gets divided among all the respected heirs.

Example: Ms. Rita owns a property of about Rs. 2 crores, and she had been renting the property, and the rent earned was one lakh. After her demise, this property goes to her daughter Ms. Sita. Ms. Sita would not be levied any inheritance tax as it is not applicable in India, but Ms. Sita would still have to pay the tax on the rent earned from renting the property. Even if, after some time or instantly, Ms. Sita sells the property, she still would have to pay the tax on the capital gains from the selling. And the tax thereby would be levied as per the cost at which Ms. Rita bought the property as the cost of acquisition.

Need for Inheritance Tax

There is a need for the inheritance tax in India because of the following reasons:

• The inheritance tax will lead to a more efficient distribution of wealth. Proper implementation of the inheritance tax can lead to better mobility of the society and efficiently distribute wealth.
• The inheritance tax act would also be in line with the egalitarian ideals of the Constitution. The equitable wealth taxation would make India an equal country in wealth distribution, thus reducing the inequality.
• The inheritance tax could help ease the tax burdens on the middle class or the working-class groups of India. Direct taxes like one from the inheritance tax act would help solve the burden on the middle class.

Conclusion

When an individual gets an asset or property as an inheritance, they are obliged to pay inheritance tax for the reason of inheriting a particular asset. This kind of tax is where an individual does not find any returns, and it is referred to as a gift on the rationale of income tax.