All About Inheritance Tax - Meaning, Calculation and History

All About Inheritance Tax - Meaning, Calculation and History. Inheritance tax is a levy imposed on individuals who inherit money, property, or other assets from a deceased person. This tax applies to various inherited assets, including real estate, gold, mutual funds, and other movable or immovable properties, whether received through a will or by succession. Unlike estate tax, which is charged on the estate itself before distribution, inheritance tax is borne by the beneficiary. Tax rates and regulations vary across jurisdictions, making it essential for heirs to understand their tax obligations.
Historical Context of Inheritance Tax in India
India previously imposed an inheritance tax, known as estate duty, under the Estate Duty Act of 1953. Estates exceeding Rs. 20 lakh were taxed at a steep rate of 85%. However, due to high litigation rates, minimal revenue generation, and administrative complexities, the tax was abolished in 1985.
Although India does not currently impose an inheritance tax, certain tax liabilities apply to inherited assets. If the inherited property generates income, such as rent or interest, it must be declared in the legal heir’s income tax return. Additionally, if an heir sells an inherited asset, capital gains tax is levied on the profit from the sale.
(a) Introduced in 1953: Aimed at wealth redistribution and revenue generation.
(b) Abolished in 1985: Due to enforcement challenges, low revenue (only Rs. 20 crore in 1984-85), and capital flight.
(c) Revival Discussions: Economists and policymakers debate reintroducing it to address wealth inequality and boost government revenue. However, concerns over capital flight and investment deterrence persist.
Global Inheritance Tax Practices
Several countries impose inheritance taxes:

United States: Up to 40%.

United Kingdom: 40%.

Japan: Highest at 55%.

South Korea: 50%.

France: 45%.

Types of Inheritance in India
Since India does not levy an inheritance tax, it is essential to understand the different means through which inheritance occurs:
1. Will of Succession: A will ensures that the deceased’s property is distributed according to their wishes. Governed by the Indian Succession Act, it requires the testator's signature and legal verification.
2. Inheritance by Nomination: Assets such as bank accounts, mutual funds, and insurance policies often have nominees. While a nominee can claim these assets, legal ownership remains with the heirs unless otherwise specified.
3. Inheritance by Joint Ownership: Some assets are inherited through joint ownership. Types of joint ownership include:

Tenants in Common: Shares of the property pass to legal heirs upon the owner’s death.

Joint Tenancy: Ownership automatically transfers to surviving joint owners.

Tenancy by Entirety: A form of ownership exclusive to spouses, requiring mutual consent for property transactions.

Taxation on Inherited Assets in India
Though India does not impose an inheritance tax, certain tax implications apply:
1. Income Tax on Inherited Property 
Inheritance itself is not taxable, but any income generated from the inherited asset (e.g., rental income) must be reported in annual tax returns.
2. Capital Gains Tax on Sale of Inherited Property
(a) Short-term Capital Gains (STCG): If sold within two years, profits are taxed per the individual’s income tax slab.
(b) Long-term Capital Gains (LTCG): If held for over two years, LTCG tax applies at 20% with indexation benefits.
3. Tax on Inheritance of Immovable Property
(a) No tax applies at the time of inheritance.
(b) Capital gains tax applies upon sale.
(c) Annual property tax must be paid.
(d) Rental income is taxable.
4. Tax on Inheritance of Movable Assets
(a) Bank accounts and lockers: No tax on inheritance, but formalities for transfer must be completed.
(b) Vehicles: Ownership must be transferred at the respective RTO without tax implications.
(c) Mutual Funds and Shares: No tax on inheritance, but capital gains tax applies upon redemption or sale.
Inherited Property Taxation for NRIs
Non-Resident Indians (NRIs) inheriting property in India are not taxed at the time of inheritance. However, selling the inherited property incurs capital gains tax:

LTCG Tax: 20.8% (including cess) with indexation benefits for properties held over 24 months.

STCG Tax: Based on income tax slabs if sold within 24 months.

Wealth Tax: Previously applicable but abolished in 2015.

Current Political Debate in India
Inheritance tax has resurfaced in the 2024 Lok Sabha elections, with Congress and BJP accusing each other of planning to revive it. The debate continues on whether such a tax could help bridge wealth disparities or discourage investment.
Conclusion
While inheritance tax no longer exists in India, inheritors must be aware of capital gains and income tax implications. Proper tax planning, such as using trusts or gifts, can help mitigate tax burdens. With ongoing discussions about its potential revival, understanding inheritance tax laws is essential for wealth management and succession planning.
Frequently Asked Questions
Q1. Does India have an inheritance tax?
Ans. No, India does not impose an inheritance tax. However, inheritors must pay applicable taxes such as capital gains tax on the sale of inherited assets and income tax on rental income from inherited properties.
Q2. What are the tax implications of selling inherited property in India?
Ans. If the inherited property is sold within two years, short-term capital gains (STCG) tax applies as per the income tax slab. If held for more than two years, long-term capital gains (LTCG) tax applies at 20% with indexation benefits.
Q3. Do NRIs have to pay tax on inherited assets in India?
Ans. NRIs do not pay tax at the time of inheritance. However, capital gains tax applies upon selling the inherited property—20.8% LTCG tax (with indexation) for assets held over 24 months or STCG tax as per slab rates for sales within 24 months.
Q4. How is inherited movable property taxed in India?
Ans. Inheritance of bank accounts, vehicles, shares, and mutual funds is not taxable. However, capital gains tax applies when shares or mutual funds are sold. Rental income from inherited property is taxable.
Q5. Is there a possibility of inheritance tax being reintroduced in India?
Ans. There have been discussions about reviving inheritance tax to address wealth inequality. However, concerns about capital flight and investment deterrence have prevented its reimplementation so far.
Q6. How can I minimize tax liability on inherited assets?
Ans. Strategies like gifting assets before death, creating trusts, and investing in tax-efficient instruments can help reduce future tax liabilities on inherited wealth.

Inheritance tax is a levy imposed on individuals who inherit money, property, or other assets from a deceased person. This tax applies to various inherited assets, including real estate, gold, mutual funds, and other movable or immovable properties, whether received through a will or by succession. Unlike estate tax, which is charged on the estate itself before distribution, inheritance tax is borne by the beneficiary. Tax rates and regulations vary across jurisdictions, making it essential for heirs to understand their tax obligations.

Historical Context of Inheritance Tax in India

India previously imposed an inheritance tax, known as estate duty, under the Estate Duty Act of 1953. Estates exceeding Rs. 20 lakh were taxed at a steep rate of 85%. However, due to high litigation rates, minimal revenue generation, and administrative complexities, the tax was abolished in 1985.

Although India does not currently impose an inheritance tax, certain tax liabilities apply to inherited assets. If the inherited property generates income, such as rent or interest, it must be declared in the legal heir’s income tax return. Additionally, if an heir sells an inherited asset, capital gains tax is levied on the profit from the sale.

(a) Introduced in 1953: Aimed at wealth redistribution and revenue generation.

(b) Abolished in 1985: Due to enforcement challenges, low revenue (only Rs. 20 crore in 1984-85), and capital flight.

(c) Revival Discussions: Economists and policymakers debate reintroducing it to address wealth inequality and boost government revenue. However, concerns over capital flight and investment deterrence persist.

Global Inheritance Tax Practices

Several countries impose inheritance taxes:

United States: Up to 40%.
United Kingdom: 40%.
Japan: Highest at 55%.
South Korea: 50%.
France: 45%.

Types of Inheritance in India

Since India does not levy an inheritance tax, it is essential to understand the different means through which inheritance occurs:

1. Will of Succession: A will ensures that the deceased’s property is distributed according to their wishes. Governed by the Indian Succession Act, it requires the testator's signature and legal verification.

2. Inheritance by Nomination: Assets such as bank accounts, mutual funds, and insurance policies often have nominees. While a nominee can claim these assets, legal ownership remains with the heirs unless otherwise specified.

3. Inheritance by Joint Ownership: Some assets are inherited through joint ownership. Types of joint ownership include:

Tenants in Common: Shares of the property pass to legal heirs upon the owner’s death.
Joint Tenancy: Ownership automatically transfers to surviving joint owners.
Tenancy by Entirety: A form of ownership exclusive to spouses, requiring mutual consent for property transactions.

Taxation on Inherited Assets in India

Though India does not impose an inheritance tax, certain tax implications apply:

1. Income Tax on Inherited Property

Inheritance itself is not taxable, but any income generated from the inherited asset (e.g., rental income) must be reported in annual tax returns.

2. Capital Gains Tax on Sale of Inherited Property

(a) Short-term Capital Gains (STCG): If sold within two years, profits are taxed per the individual’s income tax slab.

(b) Long-term Capital Gains (LTCG): If held for over two years, LTCG tax applies at 20% with indexation benefits.

3. Tax on Inheritance of Immovable Property

(a) No tax applies at the time of inheritance.

(b) Capital gains tax applies upon sale.

(d) Rental income is taxable.

4. Tax on Inheritance of Movable Assets

(a) Bank accounts and lockers: No tax on inheritance, but formalities for transfer must be completed.

(b) Vehicles: Ownership must be transferred at the respective RTO without tax implications.

(c) Mutual Funds and Shares: No tax on inheritance, but capital gains tax applies upon redemption or sale.

Inherited Property Taxation for NRIs

Non-Resident Indians (NRIs) inheriting property in India are not taxed at the time of inheritance. However, selling the inherited property incurs capital gains tax:

LTCG Tax: 20.8% (including cess) with indexation benefits for properties held over 24 months.
STCG Tax: Based on income tax slabs if sold within 24 months.
Wealth Tax: Previously applicable but abolished in 2015.

Current Political Debate in India

Inheritance tax has resurfaced in the 2024 Lok Sabha elections, with Congress and BJP accusing each other of planning to revive it. The debate continues on whether such a tax could help bridge wealth disparities or discourage investment.

Conclusion

While inheritance tax no longer exists in India, inheritors must be aware of capital gains and income tax implications. Proper tax planning, such as using trusts or gifts, can help mitigate tax burdens. With ongoing discussions about its potential revival, understanding inheritance tax laws is essential for wealth management and succession planning.

Frequently Asked Questions

Q1. Does India have an inheritance tax?

Ans. No, India does not impose an inheritance tax. However, inheritors must pay applicable taxes such as capital gains tax on the sale of inherited assets and income tax on rental income from inherited properties.

Q2. What are the tax implications of selling inherited property in India?

Ans. If the inherited property is sold within two years, short-term capital gains (STCG) tax applies as per the income tax slab. If held for more than two years, long-term capital gains (LTCG) tax applies at 20% with indexation benefits.

Q3. Do NRIs have to pay tax on inherited assets in India?

Ans. NRIs do not pay tax at the time of inheritance. However, capital gains tax applies upon selling the inherited property—20.8% LTCG tax (with indexation) for assets held over 24 months or STCG tax as per slab rates for sales within 24 months.

Q4. How is inherited movable property taxed in India?

Ans. Inheritance of bank accounts, vehicles, shares, and mutual funds is not taxable. However, capital gains tax applies when shares or mutual funds are sold. Rental income from inherited property is taxable.

Q5. Is there a possibility of inheritance tax being reintroduced in India?

Ans. There have been discussions about reviving inheritance tax to address wealth inequality. However, concerns about capital flight and investment deterrence have prevented its reimplementation so far.

Q6. How can I minimize tax liability on inherited assets?

Ans. Strategies like gifting assets before death, creating trusts, and investing in tax-efficient instruments can help reduce future tax liabilities on inherited wealth.