How Is Estate Duty Calculated In India?

In India, estate duty, also known as inheritance tax, was abolished in 1985 by the Indian government. Prior to this, estate duty was levied on the total value of the estate (assets and liabilities) inherited by legal heirs or beneficiaries. Since its abolition, there is no direct estate duty tax in India, but certain other taxes such as capital gains tax and wealth tax may be applicable during the transfer of the deceased’s estate.

Key Points to Consider Regarding Estate Duty in India:

Abolition of Estate Duty (1985):

In 1985, the Indian government abolished estate duty, and there is no estate duty or inheritance tax levied on the transfer of property from a deceased person to their heirs.

Therefore, there is no specific tax on inheritance or the value of an estate as it existed prior to 1985. However, the assets of the deceased are still subject to other taxes during the process of transfer.

Other Taxes on Estates:

While estate duty is no longer applicable, there are still taxes that may arise during the transfer of the deceased’s estate:

• Capital Gains Tax: If the inherited property is sold, capital gains tax may be applicable, depending on whether the property has appreciated or depreciated in value.
• Wealth Tax: If the total value of the assets of an individual exceeds the prescribed threshold, wealth tax may be applicable. However, wealth tax was also abolished in 2015.
• Income Tax: If the estate generates any income after the death of the individual (such as rental income or interest), the legal heir will be liable to pay income tax on it.

Transfer of Assets:

While there is no estate duty, there may be other formalities involved in the transfer of assets to the legal heirs, including:

• Probate of the Will: If the deceased left a will, the probate (a legal order from a court confirming the will’s validity) must be obtained before the assets can be transferred to the beneficiaries.
• Succession Certificate: If there is no will, the legal heirs may need to obtain a succession certificate to prove their right to inherit the deceased’s assets.

Valuation of the Estate:

When transferring the estate, the total value of the assets (such as property, cash, bank accounts, investments, and other valuables) needs to be assessed.

If the assets are subject to capital gains tax, the cost of acquisition and the market value at the time of the deceased’s death will be considered for tax calculation purposes.

Taxation on Inherited Property:

If the inherited property is sold, the capital gains tax will be calculated based on the market value on the date of the deceased’s death. This is considered the cost of acquisition for tax purposes, and any subsequent gain on the sale will be taxable.

Exemption limits for capital gains and income tax can be availed, and heirs may be eligible for rebates under specific sections of the Income Tax Act.

Legal Heir’s Responsibility for Taxes:

The legal heir (or executor of the estate) is responsible for ensuring the payment of any taxes due on the estate, including capital gains tax on inherited property, income tax on estate income, and any other liabilities.

The legal heirs should consult a tax advisor to understand their specific liabilities in case of inheritance.

Example:

If Mr. Kapoor passes away, and his son, Amit, inherits a property worth ₹50 lakh, Amit is not required to pay any estate duty. However, if Amit decides to sell the property for ₹55 lakh after 2 years, the capital gains tax would be calculated on the difference between the sale price and the market value of the property at the time of Mr. Kapoor's death, which is taken as the cost of acquisition.

Important Considerations:

No Estate Duty:

Since estate duty was abolished in 1985, there is no tax levied on the value of an estate inherited by the heirs.

Capital Gains Tax:

If inherited assets are sold, capital gains tax may apply on the profits derived from the sale.

Wealth Tax:

Although wealth tax was also abolished in 2015, it is important to note that wealth tax was previously imposed on individuals holding assets beyond a certain limit.

Inheritance Law:

The transfer of assets can be complex, especially if the deceased has not left a valid will. Legal heirs should follow due process to claim the property through probate or a succession certificate.

Professional Advice:

Heirs should seek guidance from a tax consultant or lawyer to understand potential tax implications and ensure that all formalities for transferring the estate are completed correctly.

Conclusion:

In India, estate duty has been abolished since 1985, meaning that no tax is levied on the value of the estate inherited by the legal heirs. However, capital gains tax may apply if inherited assets are sold, and income tax may apply to any income generated from the estate. While no direct tax is imposed on inheritance itself, heirs should be mindful of other tax obligations that arise during the process of transferring the estate.