What Is Inheritance Tax? How It Worked And Why India Abolished It In 1985? Explained

The Estate Tax is levied on the deceased person's estate before distribution, and the Inheritance Tax applies directly to the beneficiaries in the US

Sam Pitroda, the chief of the Indian Overseas Congress, has stirred political controversy in India with his comments regarding the United States' inheritance tax. This created a stir amidst the ongoing Lok Sabha elections and made many people curious about what the inheritance tax is and how it works.

What Is US’ Inheritance Tax

Even though inheritance tax, although often discussed in the context of the United States, is not uniformly applied across all states. Instead, it's operative solely in six out of the 50 states. This tax is imposed on individuals who inherit assets from a deceased person, with the tax rate and regulations varying based on the state where the deceased lived or owned property.

It's essential to distinguish between the US estate and Inheritance taxes. While the Estate Tax is levied on the deceased person's estate before distribution, the Inheritance Tax applies directly to the beneficiaries. Presently, only six states in the US collect inheritance taxes: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.

The rates for inheritance tax can vary, ranging from under 1 per cent to as high as 20 per cent of the value of inherited assets, including property and cash. However, this tax is typically calculated based on the value of the assets exceeding a specific amount. For example, if a certain percentage of tax applies to inherited assets surpassing $4 million, and an individual inherits assets valued at $6 million, the tax would only be imposed on the remaining $2 million.

Sam Pitroda On Inheritance Tax

In an interview with the news agency ANI, Pitroda said, "In America, there is an inheritance tax. If one has $100 million worth of wealth when he dies, he can only transfer probably 45 per cent to his children and the remaining 55 per cent is grabbed by the government. That's an interesting law.”

Inheritance Tax In India

In India, an inheritance tax law was in effect until 1985, when former Prime Minister Rajiv Gandhi abolished it. The law, known as Estate Duty, was a form of taxation calculated upon an individual's demise and was established under the Estate Duty Act of 1953. It was applicable only if the total value of the inherited portion of the estate exceeded a specified exclusion limit. In India, this tax rate could be as high as 85 per cent for properties, with those valued at least Rs 1.5 lakh taxed at a rate of 7.5 per cent. The aim of this tax was to reduce income inequality, but it was ultimately discontinued.

According to a report from the Economic Times, India removed its inheritance tax in 1985 due to its ineffectiveness in reducing economic inequality and its minimal contribution to government revenue.