The Tax That India Abolished — And Might Bring Back

Will your estate survive its comeback?

In 1985, the Indian government abolished estate duty. The reasoning was that the tax collected very little relative to the effort required to collect it, and that large estates had found too many ways around it. For forty years since, wealth has moved down the generations in India without being taxed at the point of death. An entire class of Indian families has grown up taking this freedom for granted.

That freedom may end. Not certainly, but plausibly. The policy conversation has been turning for some time.

There has been chatter amongst economists that Inheritance Tax could make a comeback in India, reaching as high as 40%, following the lead of the United States.

Take that number in. Forty per cent. On wealth passed from one generation to the next. Not on income during life — that is already taxed. Not on purchases — those are already taxed. This would be an additional, final tax, levied at the exact moment when a family is in grief and unable to restructure anything.

The number is not invented. It is the number being discussed in policy circles, borrowed directly from the US federal estate tax and the UK inheritance tax, both of which have a headline rate of 40% on the portion of an estate above an exempt threshold. Those two jurisdictions have quietly become the reference points for what an Indian version might look like.

Consider, as a hypothetical, a Pune-based family with a flat worth four crore, an industrial plot worth six crore, a basket of listed shares worth three crore, and assorted bank balances and jewellery worth two crore. The family's wealth at the time of the patriarch’s death is INR15 crore. If a 40% estate duty were introduced, and assumed for the sake of this scenario to apply without further threshold or exemption, the duty payable at death would be six crore rupees.

Six crore rupees. To be paid, in many cases, out of assets the family has no ability to liquidate quickly. The shares may be listed and saleable. The flat and the industrial plot are not. The jewellery is sentimental. Finding six crore in ready cash within a statutory window — which in most jurisdictions is measured in months, not years — is the kind of problem that forces distress sales. Families sell the wrong things at the wrong prices because they have to.

This is not a prediction that estate duty will return. It might not. The policy proposals have been floated for several years but have not been enacted. But the reason this matters for succession planning, even while the law stands as it does, is that plans made today take effect across decades. A structure put in place now may hold your family’s wealth in 2030, in 2040, in 2050. The question is not whether estate duty exists today. The question is whether your plan is robust to its existence at some point in that future window.

There is also a subtler point about why this conversation is happening now. The policy case for reintroducing estate duty rests partly on wealth inequality and partly on the growth of very large Indian fortunes. The same forces that have created the class of ultra-high-net-worth Indian families are the forces that have brought estate duty back into the conversation. In other words, the bigger the estate, the more likely it is to attract this kind of tax attention.

What should this mean for a family that has built substantial wealth?

First, it means not dismissing the conversation. A surprising number of well-off Indian families have internalised the 1985 abolition as permanent, in the way one internalises that India drives on the left. It is not permanent. It is a policy choice that can be reversed.

Second, it means taking structuring seriously in the years when structuring is possible. Structures that are put in place cleanly, in advance, and with a proper paper trail are much harder to unwind or re-tax than structures that are done in a panic after the law changes. A family that decides to build a private trust while the founder is alive, well, and deliberate has an entirely different legal position from a family that tries to do the same thing in the last weeks of the founder’s life.

Third, it means looking beyond India. For families with members in the US or the UK, forty-percent estate and inheritance taxes are already a live issue. A plan that ignores the fact that one of the heirs is a US citizen, or has been a UK resident for a decade, is a plan that has already conceded part of the tax at that foreign jurisdiction. Those taxes exist now, regardless of what India does.

The practical takeaway is to separate two questions. The first question is what the law of India is today — and today, there is no estate duty. The second question is what the law of India might be at the point when your estate actually passes. On the second question, a rate of up to forty per cent is no longer unthinkable; it is explicitly on the table in policy conversations.

A plan that cannot survive a 40% estate duty is a plan that is betting on the status quo holding for your entire lifetime. That is a bet worth thinking about carefully, not one to make by default.

Estate duty did not used to exist in India. Now it does not exist. That is not the same sentence.