Inheritance Tax in India: History, Types, and Distribution Among Heirs Explained

Recently, the Sam Pitroda controversy is trendy where he talks about the inheritance tax and its works. However, India did have an inheritance tax once in 1953, but later it was abolished in 1985 by Rajiv Gandhi. Still, there is no plan to introduce an inheritance tax but Modi Sarkar wants to do so.

 

 

Inheritance Tax In India:-

Let’s understand what inheritance tax is in India.

The inheritance tax is the tax paid when receiving an inheritance, and taxes what was obtained by the heir based on the net assets of the deceased, that is, the assets he owned less debts. In simple words, Inheritance is the set of assets and rights that are transmitted to heirs when a person dies. When there is a tax applied on this and paid to the government, it is an Inheritance tax. Remember, It occurs when there is a transfer of assets and/or rights from one natural person to another, in this case, ‘mortis causa’ (due to death) or free of charge.

The Inheritance and Gift Tax – this is how it appears in the tax legislation – is:

• Progressive: The greater the amount inherited, the higher the tax rate.
• Personal: Whoever receives the inheritance pays.
• Direct: It falls on the taxpayer’s assets, not on consumption.

Depending on the country, the inheritance tax varies at a maximum of 55%. This tax is applied to the legal heirs – children, siblings, spouses, etc. 

In India, inheritance tax is also known as estate tax or succession duty. However, there is no specific inheritance tax applied at the national level in India. inheritance tax is famous in the foreign countries like the USA, etc. 

 

 

History:

India has inheritance tax or estate duty laws that apply when there is transfer of assets to the inherent people upon death, but these laws were abolished in 1985. Since then there has been no inheritance tax law at the national level. Despite the absence of a nationwide inheritance tax, other taxes may apply to inheritances in India. For example:

• Income Tax: Inherited assets are subject to income tax if they generate any income like rent, interest, etc. The income generated by the inherited property is taxed at the income tax return filing.
• Capital Gains Tax:  inherited assets, such as real estate or stocks, are sold by the heirs, and they have to pay the capital gain tax on the profit earned from the sale. The tax rate varies and depends on the factors such as the holding period and the nature of the asset.
• Gift Tax: While there is no specific inheritance tax, gifts received during one’s lifetime may be subject to gift tax under the Income Tax Act. Any expensive gift received from relatives is considered in the Income Tax Act to pay tax on it.

 

Who is considered an heir?

In this aspect, there is a double casuistry. If there is a will, it is in this legal document that the distribution of the inheritance is determined. If there is not one, it will be distributed taking into account an order of succession: children and descendants, ascendants, spouses, siblings and other relatives. If there is no will or no relative claims the inheritance, it would pass to the State

 

 

Form of distribution to heirs

Below we show you how the estate should be divided among the heirs, which will depend:

• If there are only children: The estate will be divided equally to each child.
• If there is only one child and spouse: The estate is divided equally.
• If there is more than one child, less than 7 children and a spouse: The spouse is entitled to double the inheritance of each child, therefore each child is entitled to the equivalent of (Formula: The total of the hereditary mass divided by the number of children, plus 2) and to the spouse twice for each child.
• If there are more than 7 children and a spouse: The spouse is responsible for a quarter of the estate while the remaining part is divided equally among the children.
• If there is a spouse and ascendants: The spouse has 2/3 of the estate. The rest is divided equally between the ascendants.
• If there is only one spouse: The total inheritance corresponds to him or her.
• If there are only ascendants: The hereditary mass is divided equally between the ascendants.
• If there are other heirs: The inheritance will be divided equally.

 

 

Types of Inheritance in India:-

Despite the absence of a nationwide inheritance tax, let’s explore the types of inheritance in India and its associated tax.

 

Testamentary Succession (Will):

Testamentary succession occurs when a deceased person’s asset is transferred to the heir as per the valid will. A will is a legal document to contains details of transferring the assets to the person after death. In India, wills are governed by the Indian Succession Act, of 1925 and must comply with certain formalities for tax implication-

• If income is generated by the transferred assets, then it is subject to income tax in the hands of the beneficiaries.
• If the heir sells the inherited assets, then he/she is liable to pay the capital gain tax earned on any profit earned from the sale.

 

Intestate Succession (Without a Will):

Intestate succession occurs when a deceased person’s asset is transferred to the legal heirs. It is also specified in the Indian Succession Act, of 1925.  If there is the absence of a will or an invalid will, then the distribution of assets is governed by these laws.

• Similar to testamentary succession, income generated on the inherited assets is subject to income tax.
• Likewise, Capital gains tax may apply if the legal heirs sell the inherited assets.

 

Gifts and HUF (Hindu Undivided Family) Partition:

Like testamentary and intestate succession, inheritance in India may also occur through gifts or the partition of a Hindu Undivided Family (HUF) under the Income Tax Act. A gift received by an individual is taxable and the partition of a HUF involves the division of the family’s assets among its members, all are taxable.

 

Joint Ownership and Nomination:

Joint ownership and nomination are common methods of estate planning in India. If individuals receive assets after death through Joint Ownership and Nomination are taxable on the earned income on assets.

 

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