Inheritance Tax: A solution to ensure equality or risk to hard earned savings?


Inheritance Tax, often dubbed as the “Death Tax,” is a levy imposed on the transfer of assets from a deceased individual to their heirs or beneficiaries. The Inheritance Tax serves two main purposes. First, it helps the government generate revenue to support public finances and expenditures. Second, by taxing the transfer of large estates, it seeks to address the distribution of wealth and may reduce wealth disparity in society. 

The concept of an Inheritance Tax is, however, not new to India. Such a tax, known as estate duty or “death tax” in some countries, was very much prevalent in India around four decades ago before it was abolished in 1985. Before its abolishment, a high “estate duty” of up to 85% for properties over Rs. 20 Lakhs was required to be paid by the executors of the deceased’s estate under the Estate Duty Act of 1953. It was abolished due to concerns about its effectiveness in generating revenue and double taxation. In the following sections, we’ll explore the arguments for and against Inheritance Tax implementation, as well as its potential implications for individuals and families in India. 

Arguments For: 

  1. Promoting Wealth Redistribution: Inheritance Tax promotes economic equity by taxing large estates and redistributing proceeds to fund social welfare programs, thereby addressing wealth inequality. 
  1. Revenue Generation for Public Services: It serves as a crucial revenue source for the government, financing public services like healthcare and education, contributing to economic stability and growth. 

Arguments Against: 

  1. Double Taxation and Burden on Families: Inheritance Tax faces criticism for potentially imposing double taxation, burdening families with financial strain amidst emotional challenges. 
  1. Potential Negative Impact on Economic Growth: Opponents argue that Inheritance Tax may hinder economic growth by discouraging savings and investment, particularly impacting small businesses reliant on intergenerational capital. 
  1. Administrative Complexity and Compliance Costs: The administrative complexity and compliance costs associated with Inheritance Tax implementation could disproportionately affect middle-income families and small estates, potentially outweighing any revenue gains. 

Currently there is no Inheritance Tax system in India. Countries such as the United States, the United Kingdom, Japan, France, and Finland have already imposed Inheritance Tax policies, reflecting varying ideologies. In U.S.A., the Inheritance Tax rate is as high as 55%. In contrast, India finds itself amidst a political debate. With the ruling party expressing its disagreement and the opposing party advocating for its implementation, the topic has gained prominence, especially during the time of general elections.  

Ultimately, the path forward in India will require thoughtful consideration of its potential impact on revenue generation, wealth distribution, economic growth, and administrative feasibility 

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