Inheritance Tax in India:- Lately, the Sam Pitroda controversy has gained traction, particularly regarding his discussions on inheritance tax and its mechanisms. Notably, India had an inheritance tax back in 1953, but it was later abolished in 1985 during Rajiv Gandhi’s tenure. Despite this history, there’s currently no proposal to reintroduce an inheritance tax. However, the Modi government appears interested in implementing one.
Inheritance Tax
Main Contents
Inheritance tax in India, once prevalent, was abolished in 1985, shifting the focus to other tax implications. Despite its absence, understanding the distribution of assets among heirs is vital. Determined either by a valid will or intestate succession laws, asset division follows a specific hierarchy, with considerations for spouses, children, ascendants, and other relatives. Testamentary and intestate successions, along with gifts and HUF partitions, shape inheritance. Taxation on inherited assets, governed by income and capital gains tax, further adds complexity to the process.
Inheritance Tax Overview
| Article For | Inheritance Tax in India: Types, History & Distribution |
| Inheritance Tax | Click Here |
| Year | 2024 |
| Category | Trending |
| Official Website | Click Here |
What Is Inheritance Tax?
Inheritance tax, sometimes referred to as estate duty, is a charge placed on the value of assets passed down from a deceased individual. Essentially, it entails the government receiving a portion of the wealth transferred from the deceased to their heirs. This tax is generally levied prior to the distribution of the inheritance to beneficiaries. It’s crucial to differentiate inheritance tax from other taxes associated with death, like capital gains tax, which might come into play when inherited assets are sold.
Inheritance tax History
In India, there used to be inheritance tax or estate duty laws applicable to asset transfers to heirs upon death, but these were repealed in 1985. Since then, there has been no national inheritance tax legislation. However, despite the absence of a nationwide inheritance tax, other taxes may apply to inheritances in India. Notably:
- Income Tax: Inherited assets are liable to income tax if they generate income such as rent or interest. The income derived from inherited property is taxed when filing income tax returns.
- Capital Gains Tax: When heirs sell inherited assets like real estate or stocks, they are required to pay capital gains tax on the profit earned from the sale. The tax rate varies depending on factors such as the holding period and the nature of the asset.
- Gift Tax: Although there’s no specific inheritance tax, gifts received during one’s lifetime may be subject to gift tax under the Income Tax Act. Any significant gift received from relatives is considered taxable under this act.
Who qualifies as an heir?
The determination of heirs involves a dual scenario. If there exists a will, it is within this legal document that the distribution of the inheritance is outlined. In the absence of one, distribution occurs according to an order of succession: prioritizing children and descendants, followed by ascendants, spouses, siblings, and other relatives. Should there be neither a will nor a relative claiming the inheritance, it would then pass to the State.
Distribution Method to Heirs
Here we outline how the estate should be allocated among heirs, contingent upon various circumstances:
- If there are only children: The estate is evenly divided among each child.
- If there is only one child and a spouse: The estate is equally divided.
- If there are multiple children, less than 7, and a spouse: The spouse receives double the inheritance of each child, with each child entitled to a portion equivalent to (Formula: Total hereditary mass divided by the number of children, plus 2), and the spouse receiving twice that amount for each child.
- If there are more than 7 children and a spouse: The spouse is entitled to a quarter of the estate, while the remaining portion is evenly divided among the children.
- If there is a spouse and ascendants: The spouse inherits 2/3 of the estate, with the remainder divided equally among the ascendants.
- If there is only one spouse: The entire inheritance is bestowed upon the spouse.
- If there are only ascendants: The hereditary mass is equally divided among them.
- If there are other heirs: The inheritance is distributed equally.
Types of Inheritance in India
Despite the absence of a nationwide inheritance tax, let’s delve into the types of inheritance in India and their associated tax implications.
Testamentary Succession (Will)
Testamentary succession entails the transfer of a deceased person’s assets to the heir as per a valid will. Governed by the Indian Succession Act of 1925, wills must adhere to specific formalities for tax implications:
- Income generated by transferred assets is subject to income tax in the hands of beneficiaries.
- Capital gains tax may apply if the heir sells the inherited assets.
Intestate Succession (Without a Will)
Intestate succession arises when a deceased person’s assets pass to legal heirs, as specified in the Indian Succession Act of 1925. In the absence of a valid will, asset distribution follows these laws:
- Similar to testamentary succession, income generated on inherited assets is subject to income tax.
- Capital gains tax may apply if legal heirs sell inherited assets.
Gifts and HUF (Hindu Undivided Family) Partition
In addition to testamentary and intestate succession, inheritance in India may occur through gifts or the partition of a Hindu Undivided Family (HUF) under the Income Tax Act. Gifts received by individuals are taxable, and the partition of a HUF involves taxable division among its members.
Joint Ownership & Nomination
Common estate planning methods in India include joint ownership and nomination. Assets received after death through joint ownership and nomination are subject to taxation on the earned income from assets.
Conclusion
In conclusion, the landscape of inheritance in India is multifaceted, influenced by legal frameworks and tax implications. While the country does not currently enforce a nationwide inheritance tax, the distribution of assets among heirs is governed by intricate rules and regulations, whether through testamentary succession, intestate succession, gifts, or HUF partitions. Understanding these mechanisms is crucial for individuals and families navigating the complexities of estate planning and asset transfer. Moreover, the taxation of inherited assets, whether through income tax or capital gains tax, adds another layer of consideration in the inheritance process. Overall, a comprehensive understanding of inheritance laws and tax implications is essential for ensuring smooth transitions of wealth and assets to future generations.
FAQ’s
What is the inheritance tax in India?
In India, inheritance tax, concerning the transfer of assets from a deceased individual to their heirs, was a familiar concept for four decades until its abolition in 1985.
What are the types of inheritance in India?
Inheritance in India occurs through testamentary succession (with a valid will) or intestate succession (without a will). Additionally, inheritance can result from gifts or the partition of a Hindu Undivided Family (HUF).
Who removed inheritance tax in India?
In 1985, the then Finance Minister V.P. Singh abolished inheritance tax in India. This decision stemmed from the realization that the income generated for the Centre through such taxes was significantly less than the administrative costs incurred in implementing them. As of today, there is no tax imposed on inherited property, whether acquired through a will or intestate succession.