Inheritance Tax

• Context (LM): Sam Pitroda’s recent comments on ‘inheritance tax‘ in India have sparked a debate on whether introducing such a tax could lead to fairer wealth distribution.
• Some argue against implementing an inheritance tax in India because it would disincentivise hard work and could regress the country.

What is an inheritance tax?

• Inheritance tax, also called estate tax, is a tax imposed on the total value of money and property left behind by a deceased person.
• The tax is calculated based on the value of the assets left after any exemptions or deductions.
• Its purpose is to generate revenue for the government and redistribute wealth.
• The rates vary across countries and influence economic policies and social welfare systems.
  • In Japan, the inheritance tax rate is 55%, making it one of the highest globally.
  • South Korea has a rate of 50%, followed by France at 45%.
  • The United Kingdom and the United States both have rates of 40%.

India’s Case

• In India, there has been no tax on inheritance since the inheritance or estate tax was abolished in 1985.
• However, inherited assets may be subject to additional taxes, along with potential implications for income tax.
• India also has a capital gains tax applied when capital assets are sold.
• A proposal to impose an estate tax during the COVID-19 pandemic faced significant criticism.

Tax implication on Inheritance

• Income generated by inherited assets, like interest, dividends, or rental income, is generally subject to income tax.
• The income tax rate and treatment may vary based on the type of income and applicable tax laws.
• Tax liability arises not at the time of inheritance but when the inherited property is sold.

Taxation on capital gains from the sale of inherited property

• Capital gains from property sales are taxed differently based on how long the property was owned.
• Short-term capital gains are taxed according to the individual’s applicable slab rate.
• Long-term capital gains earned after holding the property for over 24 months face a tax rate of 20.8%, including cess.