Understanding Inheritance Tax in India

Inheritance tax is a type of tax which is levied on the income earned by an individual from his/her ancestral property. In case of properties that are equally divided among all the siblings, the tax is equally levied on the inheritors.

Also popularly known as estate tax or estate duty, Inheritance tax was a tax that was levied against a particular asset during the time of its inheritance. For example, the inheritance of ancestral land. Inheritance tax is no longer levied in India and was abolished during the time of the Rajiv Gandhi Government in 1985. Though its intentions were noble, the then finance minister, V.P. Singh was of the opinion that it had failed to bring about an equilibrium in society and reduce the wealth gap. During its stay, inheritance tax or estate duty was levied from the period between 1953 and 1985.

Many economists and a few rumour mills have contributed to the idea of bringing about a resurgence of this tax and lobbied for the reintroduction of Estate duty as they view it as a viable instrument against rising inequality and beating the deficit and bolstering revenues. These have been repeatedly denied by Government sources and even the Finance Minister Arun Jaitley has denied the reintroduction of this tax as he says that revenue garnered from this tax will be dismal as Indians do not inherit assets with values as high as those in developed countries.

There are certain countries that practice this form of taxation. Countries like USA, UK, Netherlands, Spain and Belgium all follow inheritance tax and China had gone to the extent of introducing rules for inheritance tax back in 2002 but was met with heavy opposition to the idea and were not able to implement it. Most developed countries that practice inheritance tax levy a maximum rate of as high as 80% on the net value of the assets passed on to legal heirs after the owner’s demise but these high rates are offset with the fact that most of these countries provide a strong form of social security to their citizens

Taxation of Ancestral Property:

Taxation of ancestral property that has been inherited is not applicable but income earned from such property is taxable. To explain this better, let us use the following example. Let us say Mr Gopal has a property that he purchased back in 2000 for an amount of Rs 1 crore. The property was being rented out and the rent earned was Rs 50,000. Now let us assume that Mr Gopal meets his unfortunate demise in 2016 upon which the property was inherited by his son Mr Krishna. No income tax will be levied against the receipt of the property by Mr Krishna as inheritance tax is not applicable in India but the income earned by Mr Krishna through the rent of this building need to be disclosed during filing of income tax returns

Even if Mr Krishna decides to sell this property, that is income earned and is liable for payment of capital gains on the sale of the property and the sale will be taxed using the cost at which Mr Gopal purchased the property as the cost of acquisition

If the property was equally divided among many other siblings, the tax levied on either rental income or the capital gains will be equally divided among the inheritors

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