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EXPLAINED: What is Inheritance Tax? Why was it abolished in 1985?

Inheritance tax is a form of taxation levied on income derived from ancestral property. However, India presently does not impose inheritance tax, although tax laws apply to income from inherited assets

EXPLAINED What is Inheritance Tax? Why was it abolished in 1985?
First Published Apr 24, 2024, 9:03 AM IST

Sam Pitroda, Chairman of the Indian Overseas Congress, stirred up a storm after he advocated for the reintroduction of the inheritance tax as a reform to redistribute wealth. He highlighted the inheritance tax system in America, where a portion of wealth is transferred to the government upon death, emphasizing the fairness of leaving a portion of wealth for the public good. In contrast, Pitroda pointed out the absence of such a tax system in India, where wealth is inherited in full by descendants. He emphasized the need for debate and discussion on policies that benefit the public rather than just the super-rich. 

Let us understand what Inheritance Tax is all about

What is Inheritance tax?

Inheritance tax, also known as estate tax or estate duty, is a form of taxation imposed on the income derived from an individual's ancestral property. When an individual passes away, their properties are transferred to their legal heirs, such as children, grandchildren, or wards.

Often, inherited property serves as a source of income, such as rental income or interest, for the new owner. Consequently, the new owner is required to declare this income and pay taxes accordingly.

Inheritance tax in India

Presently, India does not enforce any tax on inherited properties or assets transferred to legal heirs, nominees, or beneficiaries. However, tax regulations in India do extend to any income generated from inherited assets or properties.

For instance, if you inherit a house, you are not liable to pay inheritance tax. Nevertheless, if you choose to rent out or sell the property, you will be subject to applicable taxes on the income generated from these activities.

Abolished During the Rajiv Era

In India, inheritance tax was abolished during the tenure of the Rajiv Gandhi Government in 1985. Despite its noble intentions, the then finance minister, VP Singh, believed it failed to address societal equilibrium or reduce wealth inequality. During its existence, inheritance tax or estate duty was enforced from 1953 to 1985.

Inheritance Tax Outside India

While India has done away with inheritance tax, several countries worldwide have implemented it. Nations like the United States, United Kingdom, Belgium, Spain and the Netherlands levy inheritance tax. China also considered implementing an inheritance tax in 2002 but faced significant opposition and did not enact it.

In countries where inheritance tax is practised, the tax rate can be as high as 80% on the net value of assets inherited by legal heirs after the owner's demise. However, these high rates are often balanced by robust social security systems provided by most developed nations.

Congress under fire after Sam Pitroda advocates inheritance tax in India for wealth redistribution (WATCH)

Illustration Courtesy: MACROVECTOR/FREEPIK

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