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.

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%.

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.

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.

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.