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  • 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.
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