Saturday, 14 October 2017

Is Inheritance Tax Coming Back In India?


India had an inheritance tax way back in 1935.  It was during Rajiv Gandhi's rule in 1985, that this tax was abolished. Now, the inheritance tax might just make a comeback. The Government is thinking of re-introducing inheritance tax popularly called estate tax. This is expected to pinch the pockets of the HNI's in India.
Yes, the Government is seeking recommendations....It wants to know if you would like the inheritance tax back. This tax could be around 5-10% for families above a certain net worth and might be introduced in the next budget.
For those who don't know, inheritance tax is charged on assets which you inherit from a deceased person. This tax is charged depending on the value of the asset which you have inherited.


How does inheritance tax work?

Inheritance tax works in two ways:
1. Testate Succession where you are named in someone's WILL.
2. Intestate succession as per laws of the land.

These are restrictions on who inherits a property:
If the deceased person is an NRI or PIO (Person of Indian Origin), and this person is not a resident or an Indian citizen, then you can only inherit Indian property if you are an Indian citizen. This is as per FEMA (Foreign Exchange Management Act).
If you are a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal and Bhutan, then you cannot inherit an immovable property in India, unless you are permitted to do so by the RBI.
As per Sharia Law, non-muslims, murderers, unborn children, children born out of marriage and step-parents cannot inherit a property.

How is property inherited in India?

Before inheriting a property, you will have to make a background check. You will have to find out if the deceased from whom you are inheriting the property, had any debts. You will have to pay off these debts before declaring your share in the property.
How will you transfer the property title in your name? To transfer the property title, you will need documents like a registered WILL. If succession is intestate, you will require a succession certificate, which has been issued by a court. You will also need the encumbrance certificate and the khata of the property.

SEE ALSO: What is a Trust?


How can you avoid paying inheritance tax?

For every problem there is a solution and the rich in India seem to have found one. One of the ways to avoid inheritance tax is the creation of family trusts. Many HNI's are already protecting themselves from inheritance tax by forming family trusts.
The Indian Trusts Act 1882, governs private trusts. If you are the owner of a property and you want to transfer this property to the beneficiary (say your chosen heir), you don't vest the property with the beneficiary, but with other people called trustees. These trustees have the responsibility of passing over the benefit of the property to the beneficiary.
Trusts can be of two types:
Discretionary and Non-discretionary
Non-discretionary Trust: Let's say you are the settlor of a trust. You clearly define the beneficiaries under the trust. You say who gets how much. The trustees still manage the trust and its finances, but they do not have the discretion to decide the proportion in which the income or the corpus is to be distributed among the beneficiaries. 
Discretionary Trust: In this trust, the trustees have complete discretion to decide the proportion in which the income or the corpus is to be distributed. The trustees may distribute  the benefits to just a few beneficiaries, exclude some of them, or may not distribute income in a particular year.
Simple: The trustees have the duty to pass on the benefits to one or more of the beneficiaries, named by you (settlor).  The trustees have the discretion to decide who among the beneficiaries will benefit from the trust.


Taxability of the trust:

For a non-discretionary trust, all income is taxable in the hands of the beneficiaries. If the beneficiary is a minor, the income is clubbed with that of the parent with a higher income. For a discretionary trust, the shares of the beneficiaries are unknown. So taxation is in the hands of the trust at maximum marginal rate.
Many Countries like the US, UK and Spain among others have inheritance tax. In developed countries, inheritance tax can be as high as 80% on the net value of the assets passed on to legal heirs, after the demise of the owner. But, these countries also have a very strong social security system. Will inheritance tax be imposed in India? Wait and Watch. Be Wise, Get Rich. 

Written by

Freelance Consultant, serving the needy.


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