What is Inheritance Tax? Meaning, Applicability & India Overview

When someone inherits money, property, or assets from a deceased person, they must pay an inheritance tax. This tax is paid by the living beneficiary after they receive their inheritance, in contrast to estate taxes, which are deducted from the deceased's wealth prior to distribution.

Let’s understand with an example:

• Shikhar’s father passed away, leaving him ₹50,00,000 and a house.
   
• In India, inheritance tax applies only if the value exceeds ₹30,00,000 (the tax-free limit).
   
• Since Shikhar inherited ₹50,00,000 (₹20,00,000 above the limit), he pays 10% tax on the excess amount:
   
• ₹20,00,000 × 10% = ₹2,00,000
   
• Shikhar pays ₹2,00,000 as tax and keeps the rest.

Key Points in a Table:

The tax's dual nature presents a policy balance - it generates public funds that can support government expenditures, yet simultaneously imposes costs on inheriting families during emotionally and financially vulnerable periods.

What is Inheritance Tax?

In the past, inheritance tax, also referred to as estate duty, applied in India when assets went to descendants after a person passed away. But in 1985, these laws were repealed, and as of right now, India has no inheritance tax.

Example:

• Shikhar’s father passed away and left him ₹1 crore in cash and a house worth ₹50,00,000.
   
• The government says that if an inheritance is above ₹80,00,00, a 10% tax applies.
   
• Since Shikhar received ₹1.5 crore (₹1 crore + ₹50,00,000), he must pay tax on ₹70,00,000 (₹1.5 crore - ₹80,00,000 exemption).
   
• At 10% tax, Shikhar pays ₹7,00,000 to the government and keeps the rest.

This table shows you who pays and the tax limit with an example:

This table helps you to understand the key points with an example of Shikhar.

Important Notes

Here are some important notes related to inheritance tax:
 

• Not all countries have an inheritance tax (India doesn’t, but the UK and the US do).
• Close families (like spouses/children) sometimes pay less tax.
• Some assets (like farms or small businesses) may get tax relief.

Inheritance tax benefits the government but can burden families. Strategic planning, such as pre-death gifting, may mitigate tax liabilities, ensuring smoother wealth transfer while complying with legal frameworks.

Applicability of Inheritance Tax

Inheritance tax has some exceptional circumstances. Not all the ones who inherit property through a deceased person have to pay.

Example:
 

• Shikhar lives in a country with inheritance tax rules
   
• He inherits ₹2 crore from his uncle (not his parent or spouse)
   
• The law says:
   
  • No tax if inherited from parents/spouse
  • 15% tax if from others (like uncles) above ₹50,00,000
     
• Since ₹2 crore is above ₹50,00,000, Shikhar pays 15% on ₹1.5 crore = ₹22,50,000 tax

(Note: India currently has no inheritance tax, but this example follows systems like the U.S. federal estate tax)

When Inheritance Tax Applies:

Key Points:

• Tax depends on the relationship to the deceased
• Usually has a minimum amount before tax starts
• Some assets (like the family home) may get special treatment
• Laws vary greatly between countries

Due to these rules, Shikhar would not pay anything in case of inheritance through his father, whereas he would have to give ₹22,50,000 in the case of money given by his uncle.

How to Reduce Inheritance Tax Liability?

Through effective asset transfer structuring, inheritance tax planning helps beneficiaries pay less in taxes. While optimising exemptions and reliefs, careful planning guarantees compliance with tax regulations.

Example:

• Shikhar expects to inherit ₹5 crore from his father
   
• Normal inheritance tax would be 20% = ₹1 crore tax
   
• Instead, his father uses these methods:
   
  • Gifts ₹50,00,000 a year (tax-free limit) for 6 years = ₹3 crore tax-free
  • Buys life insurance where the proceeds go tax-free to Shikhar
  • Donates ₹20,00,000 to charity (tax-deductible)
     
• Final taxable amount: ₹80,00,000 to tax = ₹16,00,000 (saves ₹84,00,000)

Ways to Reduce Inheritance Tax:

Key Points
 

• Start planning early (years before death).
• Small annual gifts can add up to big savings.
• Different countries have different rules.
• Professional advice helps us use all legal options.

Shikhar's family saved ₹84,00,000 just by using basic tax planning methods. Proper planning makes a huge difference.

Conclusion 

The experience of Shikhar explains the importance of learning about inheritance tax. None of his father had planned his taxes, and when he died, Shikhar had to pay ₹20,00,000 in taxes on his family's house. However, when his uncle preplanned by investing small gifts year after year and investing in life insurance and opening a trust, Shikhar received the same after paying just ₹2,00,000 as tax. 

The difference? Simple preparation. As Shikhar found out, inheritance tax need not empty your cashbox or bank account should you: 1) Be early enough, 2) Utilise tax-free gifts, 3) Keep insurance in mind, and 4) Simply obtain professional advice. Laws may change depending on the country, but the concept remains the same.

Now, Shikhar tells all his friends to discuss this with their parents, just in case nobody wants to lose extra money that they could have saved.

FAQs

Do I have to pay tax if I get money or property from my parents?
Usually, no, most countries don’t tax inheritances from parents, but check local rules.

What if I inherit from my uncle or friend? Will tax apply?
Possibly yes, tax often applies if the person isn’t your parent, spouse, or child.

How much tax will I pay on inherited property?
It depends on the value and your relationship to the deceased. Some countries tax only large amounts.

Can I avoid inheritance tax by taking money before someone dies?
Sometimes, gifts before death may reduce tax, but there are limits and rules.

Is there a tax-free limit for inheritance?
Yes, many countries allow a certain amount tax-free (e.g., ₹50,00,000 or $1 million).*

Who decides the value of the inherited property for tax?
The government assesses market value, not what the deceased originally paid.
 

Do I pay tax if I inherit a house but don’t sell it?
Usually, yes, tax is based on ownership, not selling. But some places defer tax until the sale.

What happens if I can’t afford to pay the inheritance tax?
Some countries allow payment plans or even selling part of the inheritance to cover tax.

Is life insurance money taxed as inheritance?
Often no, if the policy pays directly to you, it’s usually tax-free.

What's the difference between inheritance tax and estate tax
Inheritance tax is paid by the receiver; estate tax comes from the deceased person's money before distribution.

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