6 things you need to know about inheritance tax; legal implications if a property is gifted versus if it is inherited

Currently, there is no income tax or stamp duties to be paid on inherited property in India. There are no capital gains taxes either

The last few weeks have witnessed a debate centered around the issue of inheritance tax. This was sparked by comments by Indian Overseas Congress president Sam Pitroda that prompted Prime Minister Narendra Modi to accuse the Congress of intending to take away people’s wealth even after death.

There is no income tax or stamp duties to be paid on inherited property in India. No capital gains tax either. (Representational photo) (Pexels)

Here’s a look at what inheritance tax means, the tax and legal repercussions in case a property is gifted versus if it is inherited through a will and the countries where people who inherit property are liable to pay this tax.

1 What is inheritance tax?

The inheritance tax refers to the tax levied on the value of inheritance received by a beneficiary on the death of a person.

Inheritance tax, or death taxes, or estate duty as it may be called are all taxes which are paid on the estate of the deceased. "This would be collected from the estate prior to distributions to the heirs under the Will or the heirs under intestate succession laws, explains Bijal Ajinkya, Partner, Khaitan & Co.

2 What was the Estate duty law?

Estate duty was introduced in India through Act No. 34 of 1953- the Estate Duty Act of 1953 (Act). The Act categorized estates based on the applicable slabs values with corresponding tax rates.

“The estate duty applied to both immovable and movable properties. The estate duty was applicable only if the inherited portion of the property exceeded the prescribed thresholds set by the Act. This was abolished in 1985,” said Jayshree Navin Chandra, Senior Partner, ZEUS Law Associates and Mona Dewan, Managing Associate, ZEUS Law Associates.

3 Why was the Estate duty abolished?

Estate Duty was abolished as it faced public opposition due to its steep rates which were as high as 85% for high estate value. “The imposition of estate duty led to numerous litigations due to varying rates based on estate value. It was also widely criticized and perceived as a double tax alongside wealth tax. The high administrative costs and time involved in collection of estate duty compared to the meager collections led to its abolition,” said Chandra and Dewan.

“The rate was on a gradual basis with the peak rate being 85 percent. It was abolished since the valuation required to calculate the estate was an expensive affair leading to high administrative costs which made the cost of administration higher than the estate duty collected. Must be noted that at that point in time the wealth in India was in minor pockets and that too disclosures were not at its optimum,” said Ajinkya.

4 Do beneficiaries need to pay inheritance tax on the property they inherit today?

There is no income tax or stamp duties to be paid on inherited property in India. No capital gains tax either. There will just be a court fee to be paid on the application for probate. Even if the beneficiary to an Indian estate is located outside India, most countries do not tax on the basis of receipt of an inheritance.

5 What are the tax and legal implications in case a property is gifted versus if it is inherited through a will?

If a property is gifted, income taxes and capital gains tax will not apply so long as the recipient and the ‘giftor’ are not both relatives under the income tax act. If they are not relatives the recipient would pay a tax at the ordinary rates applicable to such a person. It is important to note that there is an exemption limit applicable to gifts up to ₹50,000. There could be stamp duties on gifts, depending on the state where the property is situated as well as depending on the type of gift, ie, real estate, shares, said Ajinkya.

Any asset passing under a Will is not subject to any income tax or capital gains tax or stamp duties.

6 Inheritance tax in other countries

Taxes on estate or inheritance are applicable in many countries across the world such as the United States, United Kingdom, Japan, South Korea, Spain, Germany and France.

In Japan, inheritance tax rates are considerably high with the current highest rate standing at 55%.

In the USA, estate tax rates have been capped at 40% and it is applicable to the worldwide estate of assessee.

In the UK, inheritance tax is based on the deceased’s domicile status. The worldwide estate of those domiciled in the UK is taxed at the standard rate of 40% with certain exemptions.

On the other hand in France, estate tax rates are based on the relationship of the beneficiary to the deceased and the value of the inheritance and ranges from 5% to 60%.

“In the US and UK, there is an estate duty and an inheritance tax respectively which applies on asset passing on demise. It is important to note that there is a minimum base annual exemption for yearly gifts, however gifts in excess of the base annual exemption are counted towards a consolidated Gift and Estate Duty Act. Hence lifetime gifts and estate on demise are governed by the same law. A person cannot strip his or her wealth in his or her lifetime by making gifts and reducing his or her estate from an estate duty perspective,” explained Bijal Ajinkya, Partner, Khaitan & Co.

“Assets passing to spouse do not trigger a tax, and in fact, the surviving spouse's estate gets a consolidated limit of pre pre-deceased spouse and his/her estate limit when passing onwards. Hence, when the surviving spouse passes, the estate will benefit from two exemption limits and only the remainder will be subject to estate duty or inheritance tax,” he said.