In many countries, when the property or assets of a deceased person get passed on to their legal heirs like children, siblings, spouse, etc, a tax is levied on the value of the property.
Credit: DH File photo
New Delhi: Congress party's poll promise related to "wealth redistribution" and Indian Overseas Congress chairman Sam Pitroda's comments on 'inheritance tax' has stirred up a debate on the taxation system which was abolished in India in 1985.
In this issue of DH Deciphers, Gyanendra Keshri decodes inheritance or estate tax, its genesis, proposals and history in India, and in other countries.
What is inheritance tax?
Inheritance tax is a levy on assets inherited from a deceased person. It is paid by the beneficiary. In many countries, when the property or assets of a deceased person get passed on to their legal heirs like children, siblings, spouse, etc, a tax is levied on the value of the property.
What is the difference between inheritance and estate tax?
The main difference between inheritance and estate taxes is the person who pays the tax. While inheritance tax is paid by the beneficiary, estate tax is paid by the deceased individual's estate before the money is transferred to the heir. Since an estate tax is calculated on the estate, it doesn’t matter who the beneficiaries of the estate are, whereas for inheritance tax, the relationship between the person who died and the beneficiaries is of great importance.
What is the inheritance tax in India?
At present, there is no inheritance tax in India. This means you don’t have to pay any tax on the property you inherit from, say your parents, grandparents, spouse etc. However, you do need to pay taxes on any income or profit you make from the inherited assets. For example, rent or interest earned from inherited property need to be clubbed with your income and pay taxes accordingly.
History of inheritance and estate tax in India
India had an estate tax from 1953 to 1985. The tax was introduced in 1953 under the Estate Duty Act, 1953, in a bid to reduce economic inequality. It was a progressive taxation system. The transfer of property up to a certain value was exempted and higher rates were levied when the value of estate was higher. The tax rate was up to 85%. Revenue mop-up was low as the threshold limit was kept very high and also because it led to illegal concealment of assets and the prevalence of holding benami properties. The tax was scrapped in 1985 by the then Rajiv Gandhi-led Congress party government. Finance minister at that time was V.P. Singh. There were also concerns about double taxation, as assets were subject to both estate duty and wealth tax. Wealth tax was abolished in 2015.
Why is the inheritance tax in focus now?
In an interview to a news agency, Indian Overseas Congress chairperson Sam Pitroda advocated implementing a US-style inheritance tax in India. Explaining the concept of inheritance tax prevalent in certain American states, Pitroda highlighted that upon an individual's demise, a significant portion of their wealth is allocated to the government, ensuring that a portion of the accumulated wealth benefits the public welfare. Pitroda's comment has sparked a political row, with top BJP leaders, including Prime Minister Narendra Modi hitting out at the Congress party. However, the Congress party has distanced itself from the remark. Amid the growing controversy Pitroda issued a clarification saying he mentioned “inheritance tax in the US only as an example” in normal conversation on TV. BJP has also linked Pitroda’s comment to Congress party’s poll promise of wealth survey and redistribution.
How is inheritance tax levied in the US and other countries?
In the US, the federal government does not levy any inheritance tax. It is collected by some states. So there is no uniform inheritance tax in the US. It varies from state to state. However, the US federal government imposes estate tax. The number of federal estate tax payers is low because of the high threshold. Inheritance tax in Japan stands at 55%, one of the highest in the world. Other prominent countries that impose high inheritance tax include South Korea (50%), France (45%) and the United Kingdom (40%).