Now one of a heated debate in India is about 'inheritance tax '. Sam Pitroda made comments highlighting the importance of wealth redistribution policies. In that he mentioned about the concept of 'inheritance tax ' in America. His comments led to the disputes and debates on the topic ' inheritance tax '.
However the Congress party has said that, inheritance tax donot reflect the position of the party. Also, on Friday India's Finance Minister Nirmala Sitharaman has criticized Congress for allegedly wanting to bring inheritance tax if they are voted to power. However Congress has denied this allegation and stated that it was never mentioned in their election manifesto.
Let us leave politics apart and I donot want to take any side. Now we must be aware of the concept of inheritance tax, its history and how is it implemented by other countries.
Meaning of inheritance tax and the reason for abolishing it :
Inheritance tax is levied on property or money acquired by gift or inheritance. This concept was firstly implemented in India in the year 1953 and was named as 'estate duty'. But it was later abolished by Rajiv Gandhi's government in 1985.
The reason for abolishing inheritance tax was said as more complexity and higher administration cost compared to less revenue for implementing estate duty. Further it is said that, the entire tax collection from estate duty constituted only 0.4% of entire direct tax collection for that year.
Why both the ruling and opposition parties are discouraging inheritance tax in India?:
Estate duty was considered as an effective way to redistribution of wealth for reducing income inequalities among people. The main aim for this type of tax is to prevent concentration of wealth in the hands of certain people alone and to distribute a portion of it [received as tax by government and given as subsidies to the needed] to the needed and to fund growth projects in the country.
But the problem is, if a family having inherited property is having financial crisis they may not be able to pay the tax liability. So, they many feel difficult to develop financial conditions of their family by investing or other like means, as huge portion of their money goes just to pay tax and with remaining sum they have to run their family, save and invest. Is it practically possible?
The answer to this is, it need not be practically possible as how they think. It is because, some countries have announced a threshold limit on the inherited asset value. Now some may think look now it is practical. But then the problem here is, if a country announces $1 million to threshold limit. Let us consider the property is situated in a posh locality and is the residence of the individual. Just having the asset value need not make a person to have real cash in his hands. To make it clear, if the property is Rs1 million[ that is Rs.10 lakhs] and say the tax levied is at 10%. Then the tax liability would be Rs. 1 lakh. Let us consider the annual income of the person is 5 lakh Rs.. Here the value of the property is Rs 1 million but he does not have that money in his hands. He has his family commitments and other personal goals to be achieved. So he might be forced to sell the property just to pay the tax liability.
But see, if we take the financial position of the individuals also into consideration, then there is point at all! Since, we have growing middle class population from the levels of poverty. So most of the people would be out of this radar. Only a few high networth individuals [HNIs] would be on focus. But it is not necessary that all the HNIs need to have an inherited property.
So we should think from all angles.
So, this has a risk of making middle class even more weaker financially. This increases the income inequality in the country.
Do people of India have to pay inheritance tax?:
In India there is no inheritance tax now and the financial implications of for heirs are primarily governed by income tax regime. Under the Income Tax Act, 1961, transfer of under a gift, will or irrevocable trust are not considered as transfers for tax purposes.
However, if the person [whose assets are inherited] died and he had any outstanding tax liability to be paid, then the beneficiaries [here it refers to who are legal heirs of the dead person] are duty bound to pay the outstanding dues. Also, if the beneficiary [here it refers to person who is inheriting the property of a dead person] has sold the property or is generating an income from such an inherited property , then the beneficiaries are liable to pay tax.
But these are not inheritance tax but it can be other tax liability like income tax liability on the income earned by a person beyond a prescribed limits.
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Also read: Various ways to reduce your tax liability legally.
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