BAJAJ BROKING
March 21, 2025
12 mins read
Inheritance tax is a levy imposed on assets passed from a deceased person to their heirs. It is different from an estate tax, which is paid by the estate before distribution. In many countries, inheritance tax applies to the recipients, with rates varying based on asset value and beneficiary relationships.
Although several countries impose inheritance taxes, India currently does not. The Indian government abolished inheritance tax in 1985. However, taxes may still apply to inherited assets through capital gains tax, income tax on inherited income, or taxation upon sale.
Understanding inheritance tax, its evolution, and the taxation of inherited assets is crucial for estate planning. This article explores inheritance tax across different countries and the taxation rules applicable to inherited assets in India.
Inheritance tax is a tax levied on individuals who inherit property, money, or assets from a deceased person. The tax rate varies depending on the beneficiary’s relationship to the deceased and the asset value.
Unlike estate tax, which is paid by the deceased’s estate before distribution, inheritance tax is the responsibility of the recipient. While some countries impose inheritance taxes, others tax inherited assets differently through capital gains or transfer taxes.
Inheritance tax has existed for centuries and has evolved based on economic and political factors. Countries that impose inheritance taxes use them to generate revenue and reduce wealth inequality.
Many developed economies, including the United States, United Kingdom, Germany, and Japan, impose inheritance taxes. India, however, abolished inheritance tax in 1985, considering it counterproductive to wealth creation and capital flow.
Inheritance Tax: Historical Overview in the USA
The USA has a long history of inheritance and estate taxes. The first federal estate tax was introduced in 1916. Over time, different administrations revised tax rates and exemption limits.
Currently, the federal estate tax applies to estates exceeding $12.92 million (as of 2023). The tax rate varies between 18% and 40%. However, only six U.S. states impose inheritance taxes, with rates based on heir relationships.
Inheritance Tax: Historical Context in India
India introduced inheritance tax under the Estate Duty Act of 1953. However, it was abolished in 1985 due to concerns about its economic impact, wealth outflow, and administrative inefficiencies. Today, inheritance is subject to income tax, capital gains tax, and stamp duty on transfers.
No, India does not impose a direct inheritance tax. However, inherited assets may be subject to other taxes:
Capital Gains Tax: If the heir sells an inherited asset, capital gains tax applies based on the original purchase price.
Stamp Duty: Transferring immovable property incurs stamp duty and registration charges.
Income Tax: If inherited assets generate income (e.g., rental income, dividends), tax is applicable as per the heir’s income tax slab.
In countries that impose inheritance tax, it applies when:
The estate’s value exceeds the tax-free exemption.
The heir is not an exempt recipient (spouse or dependent child).
The inheritance consists of taxable assets such as real estate, cash, and investments.
No, the USA does not have a nationwide inheritance tax, but some states impose it. The federal estate tax applies only to high-value estates exceeding $12.92 million (2023 limit).
Step 1: Determine Gross Value of Inherited Assets
Begin by assessing the total fair market value of all inherited assets, including real estate, cash, stocks, mutual funds, jewelry, and other valuables. This requires appraisals, bank statements, or market valuations to ensure accuracy. For instance, property values are determined based on current market rates, while investments reflect their value on the date of inheritance. This step establishes the baseline for tax calculations.
Step 2: Deduct Liabilities or Debts
Subtract any outstanding debts tied to the inherited assets, such as mortgages, personal loans, credit card dues, or unpaid utility bills. For example, if a property worth ₹1 crore has an outstanding loan of ₹20 lakh, the net value reduces to ₹80 lakh. This step ensures only the net estate value is considered for taxation, preventing heirs from being taxed on liabilities they didn’t incur.
Step 3: Apply Exclusions or Exemptions
Identify exemptions based on jurisdiction-specific rules. Spouses often inherit tax-free, while charitable donations or assets left to minors may qualify for partial/full exemptions. In the USA, the marital deduction shields assets transferred to a surviving spouse, while India’s Hindu Succession Act exempts ancestral property from stamp duty in some cases.
Step 4: Determine the Taxable Value
After exemptions, the remaining value becomes the taxable base. For instance, if a ₹2 crore estate has ₹50 lakh in exemptions, the taxable value is ₹1.5 crore. This step finalizes the amount subject to inheritance tax, incorporating deductions like funeral expenses or administrative costs in certain countries.
Step 5: Calculate the Inheritance Tax
Apply the applicable tax rate to the taxable value. Rates vary by jurisdiction and heir relationship. For example, the USA taxes non-relatives up to 18%, while India imposes capital gains tax on inherited property sales. For a ₹1.5 crore taxable estate taxed at 10%, the liability would be ₹15 lakh.
Types of Inheritance Taxes in India
While India abolished the Estate Duty Act in 1985, eliminating direct inheritance tax, certain taxes and costs arise during asset transfers. The method of inheritance - via a will, nomination, or joint ownership - determines applicable fees like stamp duty, probate charges, or capital gains tax.
These are not "inheritance taxes" per se but financial obligations tied to legal processes. Understanding these nuances ensures that heirs manage transfers efficiently while minimizing liabilities.
Will of Succession
Transferring assets through a will often requires probate, a court process validating the document. In states like Maharashtra, probate fees range from 2–7% of the estate’s value. For example, a ₹1 crore property might incur ₹2–7 lakh in court fees.
Additionally, registering inherited property attracts stamp duty (3–8% of market value), varying by state. Though no direct inheritance tax exists, these costs impact heirs financially.
Inheritance by Nomination
Nomination simplifies asset transfer for bank accounts, mutual funds, or insurance policies. The nominee receives assets without probate but acts as a custodian, legally bound to transfer them to rightful heirs.
While nomination avoids probate fees, selling such assets later triggers capital gains tax. For instance, redeeming mutual fund units inherited via nomination taxes gains based on the original owner’s purchase price.
Inheritance by Joint Ownership
Jointly owned assets (e.g., property, bank accounts) pass automatically to survivors. Updating records may involve minimal fees, but selling the asset later incurs capital gains tax.
For property, the holding period starts from the original owner’s purchase date. If sold within two years, short-term capital gains (as per income slab) apply; beyond two years, a 20% tax with indexation benefits.
Inheriting assets in India doesn’t trigger direct taxes, but heirs may face financial obligations during transfers or sales. These include stamp duty, capital gains tax, or income tax on earnings from inherited assets.
Income generated from inherited assets, like rent from property or dividends from shares, is taxable under “Income from House Property” or “Income from Other Sources.” Heirs must declare this income in their ITR and pay tax as per their slab rate.
Selling inherited property attracts capital gains tax. The holding period is calculated from the original owner’s purchase date. If sold within 24 months, gains are short-term (taxed as per income slab). Beyond 24 months, a 20% tax with indexation applies.
Inheriting immovable property (e.g., land, houses) in India does not incur an inheritance tax. However, heirs must pay a stamp duty (3–8% of market value) during registration, varying by state. For instance, Maharashtra charges 5%, while Delhi imposes 6%.
When selling inherited property, capital gains tax applies. The cost basis is the original purchase price, and the sale price minus the indexed cost determines taxable gains. Exemptions under Section 54/54F apply if reinvested in specified assets like new property or bonds.
Movable assets (cash, jewelry, shares, vehicles) transferred via inheritance are not taxed in India. However, income generated post-inheritance (e.g., dividends, interest) is taxable.
Selling inherited movable assets like shares or gold may trigger capital gains tax. For shares, gains are taxed at 15% (short-term) or 10% (long-term over ₹1 lakh). For gold, a 20% tax with indexation applies if held over 36 months.
In India, inheritance itself is tax-free, meaning heirs do not have to pay any direct tax when they receive assets such as property, shares, mutual funds, or gold from a deceased person. However, while there is no inheritance tax, the income generated from inherited assets is taxable. This means that if an inherited property generates rental income, or if inherited investments yield dividends or interest, the recipient must declare this income in their Income Tax Return (ITR) and pay taxes under the relevant income tax heads.
When an heir receives an asset that generates income, they are liable to pay tax on the earnings. For example, rental income from an inherited property falls under the category of "Income from House Property." The heir can deduct municipal taxes paid on the property, and a standard deduction of 30% is allowed to account for maintenance and repairs before arriving at the taxable rental income.
While inheriting assets such as property, gold, or shares is tax-free, selling them attracts capital gains tax. The tax rate depends on the type of asset and the duration for which it was held. Inherited property, if sold after 24 months from the original owner's purchase date, is classified as a long-term capital asset, and the resulting gains are taxed at 20% after applying indexation benefits. Indexation helps adjust the asset’s purchase price for inflation, reducing taxable capital gains.
When an individual inherits mutual fund units, the inheritance itself is not taxable. However, when they choose to redeem (sell) the mutual fund units, the sale attracts capital gains tax. The holding period for mutual funds is calculated from the original date of purchase by the deceased, not the date of inheritance. If equity mutual fund units are held for more than 12 months from the original purchase date, long-term capital gains (LTCG) above ₹1 lakh are taxed at 10% without indexation benefits. If sold within 12 months, short-term capital gains (STCG) are taxed at a flat rate of 15%.
New Tax Basis for Mutual Fund Shares in Taxable Accounts
For non-retirement accounts, the cost basis of inherited mutual funds resets to their NAV on the date of inheritance. This reduces taxable gains if the NAV has appreciated. For example, if the original purchase price was ₹50 per unit and the NAV at inheritance is ₹100, the new cost basis becomes ₹100.
Inheritance of retirement accounts such as the National Pension System (NPS) or Employees’ Provident Fund (EPF) has additional tax implications. Non-dependent heirs (such as distant relatives) who inherit these funds must withdraw the entire corpus as a lump sum, which is then taxed as per their income slab.
However, for dependents such as spouses or children, the retirement account can continue in their name, though withdrawals from the account remain taxable. If the heir chooses to withdraw funds, the amount is added to their total taxable income and taxed accordingly.
NRIs inheriting property in India face specific tax rules:
No Inheritance Tax: NRIs are exempt from inheritance tax, similar to residents.
TDS on Rent: 30% TDS on rental income if PAN is not provided; 31.2% with PAN.
Tax Treaties: DTAA benefits may reduce tax liability if the NRI’s home country has an agreement with India.
Reporting: NRIs must declare global income in India if they qualify as residents under the 120-day rule.
Selling inherited property as an NRI attracts:
Capital Gains Tax: 20% on long-term gains (indexed cost basis) or as per income slab for short-term gains.
TDS Compliance: Buyers must deduct 20–30% TDS (Form 15CA/15CB required).
Tax Relief: Reinvesting gains in Indian bonds/property under Section 54/54EC offers exemptions.
Repatriation: NRIs can remit up to $1 million annually post-tax, subject to RBI guidelines.
While India lacks inheritance tax, hypothetical drawbacks in countries imposing it include:
Double Taxation: Assets bought with taxed income get taxed again upon inheritance.
Liquidity Crunch: Heirs may struggle to pay taxes on illiquid assets like property.
Administrative Burden: Legal processes (probate, valuations) delay asset transfers.
Impact on SMEs: Family businesses face challenges retaining ownership due to high tax liabilities.
Inequality: Exemptions for the wealthy (trusts, offshore assets) undermine the tax’s purpose.
Feature | Inheritance Tax | Estate Tax |
Definition | A tax is imposed on individuals who inherit assets from a deceased person. | A tax levied on the entire estate of the deceased before distribution to heirs. |
Tax Liability | Paid by the person inheriting the assets. | Paid by the estate of the deceased. |
Applicability | Applies after the estate is distributed to beneficiaries. | Applies to the total value of the estate before distribution. |
Exemptions | Exemptions vary based on the beneficiary’s relationship to the deceased and the value of inherited assets. | Exemptions are generally based on the total value of the estate, with large estates typically being taxed. |
Common In | More commonly found in a few countries, such as the UK and parts of the US. | Estate tax is more widely applicable in several countries, including the US. |
Tax rate | Rates may vary depending on the relationship to the deceased and asset value. | A fixed rate is generally applied to estates above a certain threshold. |
Purpose | Imposed to tax the transfer of wealth from one individual to another. | Designed to tax the total wealth held by an individual at death before it passes to heirs. |
India does not impose an inheritance tax, but tax liabilities arise on inherited asset income, sales, or transfers. Understanding taxation rules helps heirs plan effectively and avoid unnecessary financial burdens. Consulting a tax professional ensures compliance and tax-efficient wealth transfer strategies.
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Yes, if an heir sells an inherited property, capital gains tax applies based on the original purchase price and the holding period. Long-term capital gains tax (20% with indexation) applies if the property was held for more than two years before selling.
Holding inherited property for more than two years to qualify for long-term capital gains tax benefits.
Utilizing capital gains exemptions by reinvesting proceeds under Section 54 (residential property purchase) or Section 54EC (bonds).
Using gift transfers to reduce tax liability across family members.
No tax is levied when mutual funds are inherited. However, if sold, capital gains tax applies based on the stepped-up cost basis.
No, inherited investments are not taxed at the time of transfer. Taxes apply only when assets generate income or are sold.
Inherited mutual funds receive a stepped-up cost basis, reducing taxable gains upon sale. If held for more than one year before selling, a long-term capital gains tax (10% on gains exceeding ₹1 lakh) applies.
There is no inheritance tax in India, so no limit applies. However, assets generating income are taxed under income tax laws.
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