What Is Inheritance Tax? Meaning, Rules & Exemptions

2025-07-21

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Inheritance tax is not applicable in India. You might wonder why this topic is being brought up. Well, it has recently been raised in the Parliament of India. So, let's understand what inheritance tax is all about and, if it is reintroduced, what it could mean for individuals, families, and the broader economy.

Key Takeaways

India currently has no inheritance tax, but the concept is being debated again due to rising wealth inequality.
Inheritance tax existed in India from 1953 to 1985, but was scrapped due to poor revenue and high administration costs.
Heirs don’t pay tax on inherited assets, but must pay tax on any income earned from those assets, like rent or capital gains.
Countries like Japan use inheritance tax effectively to reduce wealth concentration, with rates as high as 55%.
If reintroduced, the tax must be fair, avoiding double taxation, and protecting family-run businesses and middle-class inheritance.

Understanding Inheritance Tax

When someone passes away, the property or assets they own usually pass to their children or grandchildren. This passing on of assets is known as inheritance.

In several countries, receiving property or assets from a deceased relative may come with a tax, commonly called inheritance tax or death tax, where the amount owed typically increases with the value of the inheritance.

India levied an inheritance tax, known as estate duty, from 1953 to 1985. The government eventually discontinued it because the cost of managing and collecting the tax outweighed its benefits. It contributed just 0.4% to the total direct tax revenue in that financial year.

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Financial Implications for Heirs in India

As discussed above, in India, when a person passes away and their assets, like property, money or jewellery, are transferred onto their children or other family members, there is no inheritance tax to be paid. Also, if you get a property through a will or if there is no will but you are the rightful heir, you do not need to pay any stamp duty either.

However, there are some situations where the heir may still have to pay taxes. If there was any unpaid income tax by the person who passed away, the heir might have to clear that. Also, if the inherited property generates income, like rent from a shop or house, the heir has to report that income and pay taxes on it.

For example, let us say Mr Mohan owns a commercial building and earns ₹ 60000 every month as rent. After his passing, the building was inherited by Rohan (his son). Now, Rohan does not need to pay any tax for inheriting the property. But since he is now earning ₹ 60000 monthly rent from it, he must file his income tax return.

If the heir decides to sell the inherited property, capital gains tax will apply to any profit made from the sale. The ownership duration is calculated by including both the period the original owner held the property and the time it was owned by the heir. This enables the heir to qualify for long-term capital gains tax rates and take advantage of indexation to reduce the taxable amount.

Key Arguments for Reintroducing Inheritance Tax in India

In many countries, inheritance tax plays a key role in reducing wealth inequality. With rising income gaps, especially in India, reintroducing such a tax is worth considering for the following reasons:

Tackling Wealth Inequality: Inheritance tax helps reduce the wealth gap by ensuring that the richest individuals don’t pass on massive fortunes untaxed. It encourages a more balanced distribution of wealth and supports economic fairness across different sections of society.
Global Support for the Idea: Countries like Japan already use inheritance tax effectively, with rates as high as 55%. This reflects a global recognition that taxing inherited wealth can help promote a more equitable society and prevent wealth from being concentrated in just a few families.
India’s Wealth Concentration Problem: In India, the richest 1% own 40% of the country’s wealth, much higher than the global average. This massive concentration of wealth highlights the urgent need for tax reforms that can promote fair economic growth and opportunities for all.
Encouraging Economic Balance: By reintroducing estate duty (a form of inheritance tax), the government can slow down the over-concentration of money and property. It’s a way to support long-term economic balance and prevent the rise of a permanent wealthy elite.
Avoiding Double Taxation Issues: Although a new inheritance tax could be beneficial, it needs to be thoughtfully structured. Since India already has a gift tax on certain transfers, any new law should make sure people aren’t taxed twice on the same assets.

Potential Challenges of Reintroducing the Tax

Given that a significant portion of Indian businesses are family-owned, reintroducing inheritance tax could potentially affect the nation's economic growth. If the tax is reinstated, some business owners may relocate their enterprises or change their place of residence to avoid paying it. There are also concerns about fairness, as individuals would be taxed again on assets already subjected to income and wealth taxes during their lifetime. The potential issues of double taxation, the effect on family-run businesses, and the practicalities of implementing and enforcing such a tax require thorough examination before any policy changes are made.

Inheritance Tax Calculation

To calculate inheritance tax, the first step is to determine the total value of the deceased’s estate, which includes assets like property, cash, jewellery, shares, vehicles, and artwork. This total value is referred to as the gross estate.

Next, any debts or outstanding loans are subtracted from the gross estate, resulting in the net estate.

Following this, a tax rate is applied according to current regulations. If the estate's value is below a specified threshold, no tax is levied. However, if the estate exceeds the limit, only the portion above the threshold is taxed.

Sometimes, people plan by giving away assets as gifts while they’re still alive or by setting up trusts to reduce the tax their heirs have to pay.

Example: Let’s say Ms. Nita inherited assets worth ₹8 crores from her mother.

There’s an exemption limit: No tax on the first ₹ 5 crores
Tax is charged only on anything above that.
So, taxable amount = ₹ 8 crores - ₹ 5 crores = ₹ 3 crores
Inheritance tax rate = 10%Tax
Ms. Nita has to pay = 10% of ₹ 3 crores = ₹ 30 lakhs

Conclusion

Reintroducing the inheritance tax in India could be a step towards reducing wealth inequality, but it requires a balanced approach. Key elements like a reasonable exemption limit, safeguards against double taxation, and protection for family-run businesses must be in place. The tax should promote fairness without discouraging entrepreneurship or long-term wealth creation. With proper planning tools, such as gifting or setting up trusts, families can preserve their legacy. Thoughtful policy design is essential for success.

Glossary

Will: A legal document that outlines how a person’s assets should be distributed after their death.
Estate Duty: Another name for inheritance tax, previously applicable in India from 1953 to 1985.
Gross Estate: The total value of all assets owned by the deceased, including property, jewellery, shares, and cash.
Net Estate: The value left after subtracting debts or liabilities from the gross estate.
Capital Gains Tax: Tax paid on the profit earned from selling inherited property or assets, based on long-term or short-term holding.

FAQs

No, India currently does not have an inheritance tax. It was abolished in 1985 due to low revenue and high administrative costs.

Inheritance tax applies after death, while gift tax applies to assets received as gifts during someone's lifetime, with certain exemptions.

If you sell inherited property, capital gains tax applies to the profit.

Rising wealth inequality has triggered discussions on reintroducing the tax to ensure fairer wealth distribution among citizens.

Families can use tools like gifting assets while alive or setting up trusts to manage and transfer wealth more tax-efficiently.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.

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