Inheritance tax in India: Explained

Inheritance tax, often called estate tax or death tax, is a tax imposed on the transfer of assets from a deceased person to their beneficiaries. The tax is levied on the total value of the deceased’s estate, including real estate, cash, investments, and other assets. It is typically paid by the estate before the assets are distributed to the heirs. This tax is a common feature in many countries, but its implementation and structure vary widely, reflecting different political, economic, and social philosophies.

Inheritance tax is designed to tax the wealth transfer from one generation to the next. The rationale behind this tax is twofold. Firstly, it serves as a source of revenue for the government, contributing to public spending on various social programs. Secondly, it acts as a tool for wealth redistribution, attempting to reduce the concentration of wealth in a few hands and promote social equity.

In some countries, inheritance tax is progressive, meaning the tax rate increases as the value of the estate rises. In others, there may be exemptions or lower rates for transfers to spouses, charitable organizations, or direct descendants. However, despite these nuances, inheritance tax is often criticized for several reasons, including the potential to double-tax assets, the burden it places on families, and its perceived interference with personal and family rights to inheritance.

India had an inheritance tax, known as the Estate Duty Act, 1953, which was implemented to address wealth inequality and generate government revenue. This tax was levied on the value of an individual’s estate at the time of their death and varied depending on the relationship between the deceased and the beneficiaries, as well as the overall size of the estate.

However, the estate duty was abolished in India in 1985, primarily due to several factors that made its enforcement challenging and unpopular. Several reasons contributed to the abolition of inheritance tax in India. The key factors include:

Administrative Complexity: Implementing and administering an inheritance tax can be complex and resource-intensive. Estate valuations require significant administrative resources, and enforcement can be complicated by attempts to avoid or evade the tax.

Evasion and Avoidance: High net worth individuals and families often find ways to minimize the impact of inheritance tax, such as transferring assets to trusts or creating complex ownership structures. This avoidance can lead to lower revenue for the government than initially expected and can increase inequality.

Burden on Middle-Class Families: Inheritance tax can place an undue burden on middle-class families, especially those who inherit assets with significant sentimental or family value. The tax can force families to sell inherited properties or other assets to cover the tax liability, which can be disruptive and financially burdensome.

Political and Social Pressure: The estate duty faced criticism from various quarters, including business owners, landowners, and politicians who argued that the tax was unfair and discouraging to entrepreneurship and family businesses. There was a growing sentiment that the tax discouraged investment and economic growth.

Limited Revenue Generation: Despite the potential for revenue generation, the actual returns from the inheritance tax were relatively low, especially when compared to the administrative costs and the effort required to combat tax evasion and avoidance. This realization made the government question the efficacy of maintaining the tax.

The abolition of inheritance tax in India was seen as a move to simplify the tax system and reduce the administrative burden. It was also an attempt to encourage wealth generation and investment, providing an incentive for business owners to invest in the Indian economy without worrying about the estate duty’s impact on their heirs. However, the abolition also sparked debates about wealth inequality and the concentration of wealth in a few hands. Critics argue that removing inheritance tax could exacerbate the wealth gap, as it allows significant wealth transfers without government oversight or redistribution.

Inheritance tax, while serving as a tool for revenue generation and wealth redistribution, can also pose challenges in terms of administration, tax avoidance, and undue burden on families. In India, the abolition of the estate duty in 1985 was driven by these complexities and the need to promote economic growth and reduce administrative hurdles. The move, however, continues to generate discussion about wealth inequality and the concentration of wealth, highlighting the ongoing debate about balancing economic growth and social equity.