INHERITANCE TAX (Syllabus: GS Paper 3 – Economy)

Context: Indian Overseas Congress chief Sam Pitroda's remarks on the US's inheritance tax have sparked a political whirlpool here in India amid the ongoing Lok Sabha elections.

Inheritance Tax

• About: It is a type of tax levied on the income earned by an individual from his/her ancestral property.
• Transfer of Property: Upon an individual's death, their properties transfer to legal heirs, such as children, grandchildren, or wards.
• Historical Context: India previously implemented an inheritance tax called estate duty from 1953 to 1985, under the government of Rajiv Gandhi.
• Redistribution of Wealth: There's been widespread discussion on using inheritance tax to redistribute wealth and tackle income inequality.
• Abolishment of Related Taxes: India has abolished various related taxes over time, including wealth tax in 2015 and gift tax in 1998.

Ways to Tax Wealth

• Taxation on Income Flow: Taxes can be imposed on the continuous flow of income generated from wealth.
• One-Time Levy on Asset Value: Governments may enact a one-time levy on the stock of wealth, often tied to the value of owned assets.
• Capital Levy on Asset Ownership: Capital levies can be imposed on the ownership of assets, particularly on the income generated as capital gains.

Estate Duty in India

• About: Estate Duty Act, 1953 imposed inheritance tax with rates ranging from 5% to 40% on estates exceeding Rs 20 lakh, with a threshold of Rs 1 lakh.
• Amendments to the Estate Duty Act: The Act was amended in 1958 to redefine accountable persons, lower the threshold, and modify tax slabs, reflecting evolving economic conditions.
• Abolition of Estate Duty: Despite ongoing discussions, the Estate Duty Act was eventually abolished, eliminating inheritance tax from India's tax regime.