India had an 'inheritance' tax 40 years ago. What it was like & why it was abolished

As a political controversy erupted over Congress’s Indian Overseas Congress chairperson Sam Pitroda remarks advocating for a US-like inheritance tax system in India, Firstpost takes a look back at the legislation which was very much prevalent in India before 1985.

How inheritance tax was levied India

In India, an inheritance tax was levied on assets or property transferred to legal heirs upon the death of the owner, whether they are children or grandchildren. Fortunately, India does not have an inheritance tax, unlike many developed countries where it is still in place. The tax system was abolished in 1985, before which a high “estate duty” of up to 85% of the inherited property’s value was required to be paid by the executors of the deceased’s estate under the Estate Duty Act of 1953.

Even though the assets passed on to legal heirs could be considered gifts since they are received without any consideration, no gift tax is imposed because the Income-tax Act of 1961 excludes assets received through inheritance or a will from the purview of gifts.

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History of Inheritance Tax

In 1953, the Estate Duty Act was enacted in India to address economic inequality by introducing an estate duty tax. This tax was designed to be progressive, with rates increasing up to 85 percent for estates valued over Rs 20 lakh. It applied to both immovable and movable properties, regardless of their location, that were inherited by successors upon an individual’s death.

To prevent tax avoidance, the law included anti-avoidance measures targeting transactions like gifts made in anticipation of death or within two years prior to death. Despite its well-intentioned goals, the estate duty law faced widespread criticism during its existence.

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The complexity of the law resulted in increased litigation and administrative costs. Also, there were concerns about double taxation, as assets were subject to both estate duty and wealth tax (which was later abolished from the financial year 2016 onwards). Furthermore, estate duty collections were lower than expected due to issues such as the illegal concealment of assets and the prevalence of holding benami properties.