Inheritance tax, also known as estate tax, is a tax levied on the total value of money and property of a deceased person before it is distributed to their legal heirs. In India currently, there is no inheritance tax. Often, inherited properties generate income, capital gains, rental income or interest income from leasing, for the new owner over a period of time. As a result, the new owner is obligated to report this income and pay the relevant taxes. The income tax rate and treatment may vary depending on the nature of the income and the tax laws applicable to different types of assets.
Basically, when a property is inherited, in India, the tax liability arises not at the time of inheritance, like in Japan, the UK or the USA. In India, the tax liability arises only when the inherited property is sold and a capital gain or some form of profit or income or revenue is derived by the inheritor. Capital gains from the sale of property are taxed based on the duration of ownership. Short-term capital gains are taxed at the individual’s applicable slab rate, while long-term capital gains, realised after holding the property for over 24 months, are taxed at a rate of 20.8 per cent including cess.
Clearly, an inheritance tax isn’t a good idea for a developing country like India and our past experiment under the Nehruvian era is undeniable proof of that.
In Japan, the inheritance tax rate stands at 55 per cent, making it one of the highest in the world, with South Korea following closely behind with a rate of 50 per cent, France at 45 per cent, while both the United Kingdom and the United States have rates of anywhere between 20 per cent to 40 per cent, each. These rates reflect the varying approaches countries take to address wealth distribution and taxation. Inheritance tax has played a big role in wealth transfers and intergenerational equity in developed nations. But to even think of superimposing inheritance tax in the Indian context is a regressive and middle-class unfriendly move.
Recently, however, a political war of words erupted over Sam Pitroda’s “US-like inheritance tax” remark. Pitroda, who heads the overseas unit of the Congress, is a very senior leader closely involved with framing the Congress manifestos over the decades and was one of Rajiv Gandhi’s closest aides. He continues to mentor Rahul Gandhi. So Pitroda’s remarks on inheritance tax surely have Rahul Gandhi’s tacit approval?
The concept of an inheritance tax is not new to India and the Congress mooted the idea repeatedly in the past in 2011, 2012 and 2013, when P Chidambaram was the finance minister, under Congress-led UPA II. Don’t forget that India had an estate tax/death duty/inheritance tax from 1953 to 1985, when Nehru was the prime minister and thereafter when Nehru’s daughter Indira Gandhi was the PM. It is true that Rajiv Gandhi revoked the inheritance tax in 1985, but it was not Rajiv’s doing, truly speaking. In 1985, it was the then finance minister VP Singh who revoked the inheritance tax, much against Rajiv’s wishes.
The inheritance tax was introduced in 1953 under the Estate Duty Act in a bid to tax the super-rich, to pass on a huge amount of wealth to the next generation. In simple terms, estate duty was imposed on the total value of the property held by an individual at the time of his/her demise. The tax had to be paid when the property was passed on to the heir. The duty was imposed on all immovable property as well as on all movable property situated in India or outside. However, the tax was unpopular among the people as estate duty rates were as high as 85 per cent on properties whose value exceeded Rs 20 lakh.
While the law was brought to increase state revenue and reduce the stark economic disparity at that time, it failed to reduce inequalities in the years that it was in force. If anything, income disparities only increased between 1953 and 1985 in India. The law had different valuation rules for different kinds of property, making it a complex legislation resulting in a huge amount of court litigation and significant administration costs.
According to various reports, the total tax collected in 1984-85 under the Estate Duty Act was only a measly Rs 20 crore. However, the cost of collection was far higher. Like all Nehruvian blunders, this was yet another one that was marred by faulty execution and poor thinking. The practice of holding benami properties also gained traction between 1953 and 1975. Moreover, a separate estate tax on top of an income tax was seen as double taxation by many in those years, leading to resentment among the public. The harebrained Nehruvian idea of therefore bringing back an inheritance tax by Sam Pitroda and the Congress is just a means to tax India’s middle class inequitably. The inheritance tax matter went into cold storage after the Narendra Modi-led NDA government won the 2014 and 2019 Lok Sabha elections.
As they say, don’t fix something which is not broken. Today, with the overall tax-to-GDP ratio at a healthy 11.7 per cent, the highest since 1999 and the direct tax-to-GDP ratio at 6.11 per cent, the highest ever since 2007-08 (FY08), there is no need to re-impose an inheritance tax. Direct tax collection has tripled and return filers increased by 2.4x in the last 10 years under the Modi government. The contribution of direct taxes – which majorly comprises corporate tax and personal income tax collections – has reached the pre-pandemic levels. In FY23, direct taxes made up 54.62 per cent of the government’s total tax revenues, up from 52.27 per cent in FY22 and 46.84 per cent in FY21.
Direct tax revenues have shown a sharp surge, with income tax seen overshooting the BE for FY24 by 13.5 per cent and Securities Transaction Tax (STT) revenue seen exceeding BE by 15.8 per cent. Tax buoyancy which was 2.52 in FY22 and 1.18 in FY23, rose to 1.4 in FY24, showing a stable trajectory in terms of tax efficiency within the tax apparatus. The projected gross tax revenue (GTR) mop-up growth in FY25 implies a tax buoyancy of 1.1 in the next financial year, assuming the 10.5 per cent nominal GDP growth estimate. The buoyancy in FY24 at 1.4 is in fact, the second-highest in the last seven financial years. Against such a healthy backdrop, where is the need for an inheritance tax?
Coming back to the Modi era of the last 10 years, despite a steep fall in tax rates, higher tax revenues show that tax leakages have been plugged in and tax compliance has dramatically improved. In a bid to further rationalise taxpayer services, the Modi government has decided that outstanding direct tax demands up to Rs 25,000 pertaining to the period up to FY 2009-10 will be withdrawn, as stated in the interim budget. Outstanding direct tax demands up to Rs 10,000 for financial years 2010-11 (FY11) to 2014-15 (FY15) will also be withdrawn. This will benefit one crore taxpayers, especially the lower middle class. Tax benefits to startups and investments made by sovereign wealth funds or pension funds have been extended to March 31, 2025, to further enable the entrepreneurial ecosystem.
Tax exemption on certain income of IFSC units has also been extended by a year to March 31, 2025, from March 31, 2024, which is good news. Speaking of taxes, for an individual below 60 years of age, the basic exemption limit was raised by the Modi government over the years from Rs 2 lakh to Rs 2.5 lakh per annum. For senior citizens (aged 60 years and above but below 80 years), the basic income exemption limit is Rs 3 lakh. For super senior citizens (aged 80 years and above), the basic income exemption limit is Rs 5 lakh. The limit for deduction under Section 80C was increased to Rs 1.5 lakh from Rs 1 lakh annually, while the deduction limit for interest on home loans was increased to Rs 2 lakh from Rs 1.5 lakh annually. The transport allowance exemption was also increased from Rs 800 to Rs 1600 per month.
An additional deduction of Rs 50,000 for contributions under the National Pension Scheme (NPS) under Section 80 CCD, has also been allowed. Under the Senior Citizen Savings Scheme (SCSS), the maximum deposit limit was hiked last year to Rs 30 lakh from Rs 15 lakh. The scheme provides 8 per cent interest per annum, paid on a quarterly basis. Under the Post Office Monthly Income Scheme (POMIS), the investment limit was increased last year to Rs 9 lakh, from Rs 4.5 lakh. In the case of joint accounts, the investment limit was increased to Rs 15 lakh from Rs 9 lakh. The investors in this case earn interest of 7.1 per cent per annum. Senior citizens who depend on only pension and interest income no longer have to file tax returns.
In order to reduce tax harassment, the Modi government last year reduced the time frame for reopening income-tax assessment cases to three years from six years. Assessment can be re-opened for up to 10 years in serious tax evasion cases only when there is evidence of concealment of income of Rs 50 lakh or more in a given financial year. Wealth tax stands abolished. The limit of deduction on rent paid under Section 80GG was also raised from Rs 24,000 per year to Rs 60,000 per year. A 10 per cent income tax on dividends is now levied only on dividend income in excess of Rs 10 lakh annually, therefore shielding the middle class. The tax rate was reduced from 10 per cent to 5 per cent in the Rs 2.5 lakh-Rs 5 lakh per annum bracket. Deduction under 80D for health insurance was raised to anywhere between Rs 25,000 to 50,000 per annum depending on the age bracket. Deduction for interest income earned on deposits with banks and post offices was increased to Rs 50,000 from Rs 10,000 in the case of senior citizens, along with an exemption from the deduction for tax for interest income up to Rs 50,000, under Section 80 TTB. Standard deduction was also increased to Rs 50,000 from Rs 40,000 for the salaried class opting for the old tax regime. Mahila Samman Savings Certificate offering an interest of 7.5 per cent p.a. was introduced last year as a one-time small savings scheme with a maturity period of two years, for women. A woman or guardian of a girl child can deposit a maximum amount of Rs 2 lakh under this scheme.
While all tax exemptions and concessions have been repeatedly relaxed over the years under the benign Modi government in the last 10 years, in a pathbreaking move, it introduced new tax slabs too, in 2020. The new tax regime was optional and the taxpayers were given the choice to either remain in the old regime with various exemptions and deductions as stated above, or opt for the new reduced tax rates without those exemptions.
Increasingly, the new tax slabs have now become the default taxation option used by taxpayers. Under the new tax slabs, there is zero tax for annual income up to Rs 2.5 lakh, 5 per cent tax for income between Rs 2.5 lakh and up to Rs 5 lakh, 10 per cent for annual income between Rs 5 lakh and up to Rs 7.5 lakh, 15 per cent tax for income between Rs 7.5 lakh and up to Rs 10 lakh per annum, 20 per cent for income between Rs 10 lakh up to Rs 12.5 lakh, 25 per cent for annual income between Rs 12.5 lakh and up to Rs 15 lakh and 30 per cent for annual income above Rs 15 lakh.
The new tax slabs offer an efficient and competitive tax structure, leaving far higher disposable income in the hands of the middle class. Also, dividends received from mutual funds and domestic companies are now taxed in the recipient’s hands. If the employer’s contribution exceeds Rs 7.5 lakh in a year towards NPS, superannuation fund, and EPF, it will be taxable in the hands of the employee. The draconian Dividend Distribution Tax (DDT) dating back to 1997, stands abolished.
Other measures by the Modi government to ease tax compliance include pre-filled income tax returns (ITR) forms and exemption of dividend payment to REIT/InvIT from TDS, among others. In a significant move, in 2022, the tax deduction limit for state government employees’ contribution to NPS was raised to 14 per cent from 10 per cent. In 2023, there was an extension of rebate for annual income up to Rs 7 lakh, from the earlier Rs 5 lakh, for people under the new income tax regime. A Standard deduction of Rs 50,000 was also introduced last year under the new income tax slab, which was a benefit that was earlier limited only to those opting for the old tax regime. To cut a long story short, the old tax regime offers a plethora of rebates and tax-deductible exemptions.
Since 2023, the new tax regime has become the preferred tax regime and it is highly middle-class friendly. Speaking of TDS, when it is being collected by any entity other than banks, the income must exceed a minimum limit of Rs 5000 for TDS to be collected; no TDS is levied till Rs 5000. This helps the lower middle class. In all the cases where the entity providing the interest is either a bank, a cooperative society undertaking banking activities, or a Post Office providing interest on deposits or schemes of the Central government, the threshold for levying TDS has been raised from Rs 10,000 to Rs 40,000 and for senior citizens, it is Rs 50,000. This is again a middle-class friendly move. Similarly, the threshold for TDS on rent was also raised to Rs 2.4 lakh from FY23 onwards (the threshold limit was Rs 1.80 lakh until FY19).
Hence the narrative that the Modi government has done very little for the middle class is false. Look at the hard facts on this – there is no tax liability for annual income up to Rs 7 lakh now. The presumptive taxation threshold for retail businesses has increased to Rs 3 crore from Rs 2 crore earlier. The presumptive taxation threshold for professionals has increased to Rs 75 lakh from Rs 50 lakh. Corporate income tax was decreased to 22 per cent from 30 per cent for existing domestic companies and from 25 per cent to 15 per cent for new manufacturing companies, in September 2019. Minimum Alternate Tax (MAT) was also reduced from 18 per cent to 15 per cent. The average processing time of tax returns today has reduced to 10 days from 93 days in FY14. Faceless Assessment and Appeal was introduced for greater efficiency and that is working well. Updated income tax returns, new form 26AS and pre-filled tax returns for simplified return filing, have made life easier for ordinary taxpayers. With regard to Customs duties, there has been a reduction by 47 per cent to 71 hours at inland container depots, a reduction by 28 per cent to 44 hours at air cargo complexes and a reduction by 27 per cent to 85 hours at seaports.
Keeping the middle class at the forefront of its agenda, the Modi government decided to give a fillip to the buyers of affordable houses. Budget 2021 extended the time period of taking loans to buy affordable houses by one year – i.e. from March 31, 2021, to March 31, 2022, to avail additional tax benefits of Rs 1.5 lakh u/s 80-EEA of the Income Tax Act, 1961. Section 80-EEA provides tax benefits up to Rs 1.5 lakh on the interest paid on loans taken for residential house property, for affordable housing. The benefit is over and above the tax benefit of Rs 2 lakh available u/s 24(B) of the Income Tax Act, on interest on housing loans on both self-occupied and rented properties. So effectively, by buying an affordable house, a taxpayer may avail tax benefits up to Rs 3.5 lakh, on interest paid on a home loan taken to buy such a house. The value of the house property should not exceed Rs 45 lakh.
The Modi government has doubled the deposit limit of the Post Office Monthly Income Scheme (POMIS) in Budget 2023 to Rs 9 lakh, up from the current Rs 4.5 lakh, for individual account holders. The new limit for the joint account holders will be Rs 15 lakh, up from the current Rs 9 lakh. Senior Citizen Saving Scheme (SCSS) limit too hiked from Rs 15 lakh to Rs 30 lakh, which is a huge bonanza for senior citizens. The new one-time, small savings scheme, ‘Mahila Samman Bachat Patra’ with a 7.5 per cent assured return for 2 years will further encourage a savings culture among girls/women.
The highlight of Modinomics is the revision in the framework of the new income tax regime for which the rebate has been raised to Rs 7 lakh per annum from Rs 5 lakh under section 87-A, for those in the new tax regime. The tax exemption limit has been raised from Rs 2.5 lakh to Rs 3 lakh per annum in the new regime. This will provide major relief to all taxpayers in the new regime. The highest surcharge rate in personal income tax has been reduced from 37 per cent to 25 per cent in the new tax regime for income above Rs 2 crore. This would result in the maximum tax rate of personal income tax coming down to 39 per cent, which was earlier 42.74 per cent.
The Modi government has sent out a strong message that it stands for the poorest of the poor and does not believe in crony capitalism, but equally, it stands for wealth creation too and being rich is certainly not a crime. The limit of tax exemption on leave encashment on the retirement of non-government salaried employees has been increased from just Rs 3 lakh to a massive Rs 25 lakh. The best thing about Modinomics is that it is low on incrementalism and high on sweeping changes that can have a virtuous, multiplier effect. Revenue of about Rs 38,000 crore will be foregone as a result of the new tax regime while revenue of about Rs 3000 crore will be additionally mobilised. Thus, the total revenue foregone is about Rs 35,000 crore annually, on account of these tax proposals. So while the benefits via the new tax regime to the middle class will be huge, the impact on the government exchequer will be minimal.
“In matters of style, swim with the current; in matters of principle, stand like a rock,” said Thomas Jefferson, ages back. The ability to push through hard reforms and an uncompromising attitude in matters of quality of governance, transparency and probity, are eventually the very things that put Modinomics miles ahead of the competition.
Sanju Verma is an Economist, National Spokesperson of the BJP and Bestselling Author of “The Modi Gambit”. Views expressed in the above piece are personal and solely that of the author. They do not necessarily reflect News18’s views.