India's former inheritance tax explained

Indian Overseas Congress chairman Sam Pitroda

On April 24, Sam Pitroda—the chairman of the Indian Overseas Congress, an arm of the grand old party—created a flutter by bringing up inheritance tax while defending the Congress’ wealth redistribution narrative.

He said, “India should benefit from the wealth of the super-rich. In America, there is an inheritance tax. If one has $100 million worth of wealth and when he dies he can only transfer probably 45 percent to his children, 55 percent is grabbed by the government.”

The Congress was quick to distance itself from this remark. Senior party member Jairam Ramesh took to social media platform X (formerly Twitter) to say, ““This does not mean that Mr. Pitroda's views always reflect the position of the Indian National Congress. Many times they do not.” Ramesh also said this was Bharatiya Janata Party's (BJP) tactic to divert attention from other serious issues.

While other members of the party and allied organisations have taken pains to point out that such a proposal finds no mention in the Congress manifesto, it is a fact that India did have a contentious inheritance tax law until four decades ago. It was in fact abolished in 1985, a year after Rajiv Gandhi assumed prime ministership. The then Congress leader VP Singh was the finance minister when the law was repealed.

In his 1985 budget speech, Singh batted for abolishing the tax noting that the existence of two separate laws to tax a person’s property while he was alive (wealth tax) and after he dies (estate duty) amounted to harassment of taxpayers. He also said that estate duty had not achieved its stated objectives of ameliorating the unequal distribution of wealth and assisting states in financing their development schemes.

Moneycontrol explains what the duty was all about, why it was tedious and how the inheritance tax plays out in other countries.

Estate duty was introduced in 1953 with the purpose of adding a revenue source to the government.

It was a form of tax payable when the property of a deceased person passed on to his successors or as per his will and was levied on all movable and immovable property concerned. However the government revised the exemption limit for levy of estate duty from time to time. At the time it was abolished, the duty was applicable on all the properties valued over Rs 1 lakh and could run up to 85 percent.

The law made minute differentiations between a deceased person domiciled in India and one settled overseas. For instance, if the deceased individual was domiciled in India at the time of his death, the duty was leviable on all immovable property situated in India, and on all movable property situated in India and abroad. If the deceased individual was domiciled outside India, the duty was leviable on all immovable and movable property situated in India, and movable property situated outside India.

The law also had provisions to prevent escaping the duty. For instance, Section 9 of the act of the estate duty act, 1953 stated that charitable donations made six months before death and gifts given two years before death were to be treated as ownership having been passed to the receivers at the time of death and the applicable duty was thus levied.

The act was considered complicated as it had different valuation rates for different kinds of properties. In most cases the government’s valuations were not accepted by those who had to pay the tax, as a result of which the law was heavily litigated upon.

It got to the point where the costs of litigation in many cases began to be higher than the sums sought to be recovered. According to some reports, only Rs. 20 crore was collected in 1985 in the form of estate duty. People also resorted to steps like benami transactions or transactions where property was transferred under fictitious names or ostensible in favour of a third party to avoid estate duty. All this resulted in the government finally abolishing it in 1985.

US: In the US, there is federal estate tax that very few people end up paying since it is levied on estates valued at over $ 13 million. These estates are taxed at up to 40 percent.

Of its 50 states, 13 states including the District of Columbia impose an estate tax or ‘death tax’. Each state has a different threshold.

However, only six states levy the inheritance tax. It is imposed on someone who has inherited money, property or other assets and is applicable only when the person dies and passes on assets in the states that have an inheritance tax.

UK: The island nation has its own version of inheritance tax where it is paid on the value of the deceased’s net estate at the time of death. The tax is calculated as the value of assets minus debts, and after calculating tax reliefs available, according to the House of Commons Library. Inheritance tax is charged at 40 percent above a threshold, currently set at £325,000.

France: The French inheritance tax is called droits de succession. It is paid by each beneficiary depending on the amount they inherit or receive as a gift, and their relationship to the deceased/donor. France is in fact the only country where the tax rate depends on the relationship of the donor and the beneficiary. It is levied not only on French citizens but also on those who inherit a property located in France. There is a direct succession rate which is a maximum of 45 percent and an indirect succession rate which carries a maximum of 60 percent.

Japan: This country boasts among the world's highest inheritance tax rates, ranging between 10 and 55 percent depending on the quantum of inheritance. The 55 percent tax is imposed only if the inheritance is valued at over 600 million yen. There is a basic exemption of 30 million yen plus 6 million per heir deducted from the estate. Each individual who has inherited assets will have to pay the inheritance tax without an exemption. A Japanese resident who receives an inheritance from abroad should also pay the tax.