In the world of estate planning, one of the most frequently asked questions revolves around inheritance estate tax and whether it applies in India.

While inheritance and estate taxes have been abolished in India, understanding their implications is crucial, especially when dealing with cross-border assets or planning for future generations.

Here's a detailed look at inheritance estate taxes, their history in India, and how they compare globally.

What Is An Inheritance Estate Tax?

Inheritance estate tax refers to the tax levied on the transfer of assets from a deceased person to their legal heirs.

This tax can take two forms:

1. Estate Tax: Charged on the entire estate's value before distribution.
2. Inheritance Tax: Imposed on the Beneficiaries based on their share of the inheritance.

In countries where these taxes exist, they are calculated based on factors such as the value of the estate, the relationship between the deceased and the Beneficiary, and the applicable tax slabs.

A Historical Overview Of Inheritance Estate Tax In India

India had an estate duty system from 1953 to 1985, governed by the Estate Duty Act, 1953. This tax was levied on the estate of the deceased, including movable and immovable properties.

However, it was abolished in 1985 due to administrative inefficiencies and concerns that it discouraged wealth accumulation and growth.

Since then:

• There is no inheritance tax in India.
• Beneficiaries receive their inheritance without any direct tax liability on the assets.

However, certain tax implications, such as capital gains tax, can arise when inherited assets are sold.

Global Context: How Inheritance & Estate Taxes Work Elsewhere

Inheritance and estate taxes are common in many countries, particularly in the United States, United Kingdom, and European nations.

1. United States: The federal estate tax applies to estates exceeding a specific threshold (currently $12.92 million in 2023). Beneficiaries do not pay inheritance tax directly, but the estate is taxed before distribution.
2. United Kingdom: Inheritance tax is levied at 40% on estates above £325,000, with certain exemptions for gifts made during the deceased's lifetime.
3. Japan and South Korea: Known for having some of the highest inheritance tax rates globally, exceeding 50% in some cases.

India’s lack of an inheritance estate tax makes it an attractive jurisdiction for wealth accumulation and transfer compared to these nations.

Tax Implications For Inherited Assets In India

Although there is no inheritance estate tax, inheriting assets in India isn't entirely free of tax implications.

Here’s what you need to know:

1. Capital Gains Tax

• When an heir sells inherited property or assets, capital gains tax applies.
• The cost of acquisition for the heir is considered the original purchase price paid by the deceased.
• Indexation benefits can help reduce tax liability for long-term capital gains.

2. Gift Tax

• Inherited assets are exempt from gift tax under the Income Tax Act, 1961, as they are received through inheritance.
• However, subsequent transfers of these assets to non-relatives may attract gift tax.

3. Income from Inherited Assets

• Income generated from inherited assets, such as rental income from property or dividends from shares, is taxable in the hands of the heir.

Cross-Border Considerations: What NRIs & Indian Residents Need To Know

For individuals with global assets or Indian assets being inherited by NRIs, taxation becomes more complex:

• Double Taxation: If the country where the assets are located imposes inheritance tax, Indian beneficiaries may face double taxation unless covered under a Double Taxation Avoidance Agreement (DTAA).
• Foreign Exchange Management Act (FEMA): NRIs inheriting property in India must adhere to FEMA regulations.

Why India Might Reintroduce Inheritance Or Estate Taxes

Given the global trends and the need for equitable wealth distribution, there have been discussions about reintroducing estate duty or inheritance tax in India.

Advocates argue that:

• It could help bridge the wealth gap.
• Tax revenue from high-net-worth individuals (HNWIs) could fund public welfare.

However, critics point to the potential for increased tax evasion and administrative challenges.

Steps To Mitigate Tax Implications On Inherited Assets

While India doesn’t have an inheritance tax, proper estate planning is crucial to ensure smooth asset transfer and tax efficiency.

Here are some steps to consider:

1. Create a Valid Will

• A well-drafted Will ensures clarity on asset distribution, reducing potential disputes and delays.
• Registering the Will under the Indian Registration Act adds legal sanctity.

2. Use Trusts for Wealth Transfer

• Setting up a Trust can protect assets and provide Beneficiaries with structured access to wealth while minimising tax liabilities.

3. Leverage Tax-Efficient Investments

• Investments like mutual funds and life insurance policies can be structured to minimise tax burdens for heirs.

4. Seek Professional Advice

• Engage with estate planners and tax advisors to navigate complex situations, especially involving cross-border assets.

Common Questions About Inheritance Estate Tax In India

1. Do heirs need to pay any taxes on inherited assets?

Heirs don’t pay inheritance tax, but capital gains tax applies if they sell inherited assets.

2. Are gifts received as inheritance taxable?

No, gifts received through inheritance are exempt from tax under the Income Tax Act.

3. What happens if the deceased had unpaid taxes?

The deceased’s legal heirs are responsible for settling any outstanding tax liabilities before claiming assets.

4. Is there any tax on receiving money from an NRI parent’s estate?

Receiving money is tax-free, but FEMA regulations must be followed for foreign currency remittances.

The Importance Of Estate Planning In The Absence Of Inheritance Tax

Even though India doesn’t have an inheritance tax, estate planning remains vital. Without a clear plan:

• Disputes among heirs can delay asset transfer.
• Legal and procedural hurdles can result in unnecessary expenses.

Key Estate Planning Tools

1. Wills: A legal declaration specifying asset distribution.
2. Trusts: Secure assets and minimise tax liabilities.
3. Nomination: Ensures smooth transfer of financial instruments like bank accounts and insurance policies.

The Bottom Line: Do You Need to Worry About Inheritance Estate Tax in India?

While inheritance estate tax is not a concern in India, understanding its implications and related tax liabilities is crucial.

Proper estate planning can help you:

• Avoid unnecessary tax burdens.
• Ensure seamless wealth transfer.
• Protect your family’s financial future.

With India’s growing wealth, the conversation around estate taxes may evolve in the future. Until then, leveraging tools like Wills and Trusts ensures your legacy is passed on efficiently and without disputes.

Take charge of your estate planning journey today and secure a worry-free inheritance process for your loved ones.

At Yellow, we can help you with all aspects of estate planning, including Wills, Trusts, Powers of Attorney, Gift Deeds, Legal Heir and Succession Certificates, and Living Wills. We also offer post-demise and asset transfer services. Our team of legal experts has more than 50 years of combined experience.