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Estate tax
Summary: Understand the concepts of estate tax, gift tax and inheritance tax imposed globally on transfer of assets. Learn about the status of these taxes in India, arguments made for and against them, and their role in preventing dynastic accumulation of wealth.
Estate tax, gift tax and inheritance tax are levies imposed on the transfer of assets or property from one individual to another, either during the lifetime or at the time of death. While called by different names, the essence is a tax on the transfer of wealth. Currently, India does not have inheritance tax or estate tax. Gift tax was abolished in 1998. However, the concepts are worth understanding from a global context.
Estate tax
An estate tax is a levy imposed on the total value of property or assets transferred by a deceased person to their legal heirs. It is levied as a percentage of the net worth left behind by an individual at the time of death before it is passed on to the beneficiaries.
The United States imposes an estate tax at the federal level. India abolished estate duty in 1985. Estate tax aims to prevent accumulation of family wealth over generations. It also generates revenue for government.
Gift tax
A gift tax is levied when an individual gifts assets or wealth exceeding a specified limit to another person or legal entity. It is applicable for gifts given during the lifetime, as against inheritance at the time of death. The giver or donor of the gift is responsible for paying the applicable gift tax.
India abolished gift tax in 1998. Currently, only stamp duty is payable on gifts made under a Gift Deed. Gifts received from certain relatives are exempt from tax. Gift tax aims to curb avoidance of estate tax through substantial lifetime asset transfers.
Inheritance tax
An inheritance tax is applicable when a person inherits assets, property or wealth from a deceased person. It is levied on the receiver or beneficiary of the inheritance. The tax rate may depend on the relationship between the benefactor and beneficiary.
Inheritance tax exists in many countries including UK, Japan, France and others. It is levied on the portion of inheritance above a certain threshold. There is no inheritance tax in India.
Status of death taxes in India
Though there is no separate inheritance tax, applicable income tax laws treat inherited assets as income in the hands of the legal heir. Long-term capital gains tax is applicable if inherited property is sold by beneficiary after a holding period. Local levies like stamp duty are payable on registration of assets inherited. Voluntary disclosure schemes tax undisclosed assets, holdings revealed in wills.
Global scenario of estate and inheritance taxes
The United States imposes both federal estate and state-level inheritance taxes. UK has a hefty 40% inheritance tax on estate value above a threshold. Many European nations like France, Germany, Spain have sizeable inheritance taxes. Canada levies estate taxes at provincial level along with capital gains on inherited assets. Australia scrapped estate taxes in late 1970s and has no inheritance taxes. Singapore abolished estate duty in 2008 after removing gift and inheritance taxes earlier. India, Malaysia, Sri Lanka are some Asian countries without estate or inheritance taxes now.
Arguments in favour of estate and inheritance taxes
Curbs intergenerational transfer of wealth and prevents emergence of dynasties.
Source of government revenue from people with capacity to pay.
Promotes equitable distribution of wealth in the society.
Limits accumulation of assets only with privileged few.
Reduces importance of hereditary wealth over merit and hard work.
Arguments against estate, gift and inheritance taxes
Unfair to levy tax again upon death as taxes already paid by earning individual on wealth.
Disincentivizes wealth creation and hurts entrepreneurship.
Forces liquidation of family businesses, properties to pay taxes.
Promotes capital flight, tax avoidance through change of domicile by wealthy.
Compliance and administration costs increase burden on taxpayers.
While estate, gift and inheritance taxes aim to build progressive tax structure, counterarguments call them unfair. India has selectively done away with these taxes. The debate on merits and demerits of taxing intergenerational transfer of wealth continues globally.
Disclaimer
The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.