While India does not currently impose an inheritance tax or estate duty, the growing global trend toward wealth taxation, along with increasing scrutiny of high-net-worth individuals (HNIs), necessitates proactive succession and estate planning. For HNIs in India, legacy planning is not merely about transferring wealth—it involves strategic legal structuring to minimise future tax liabilities, ensure smooth intergenerational transition, and mitigate risks of litigation or fragmentation of assets. This article explores key legal strategies and instruments that HNIs in India should consider for effective inheritance tax planning, keeping in mind Indian regulations and international developments.
1. Understanding the Indian Legal Landscape: No Inheritance Tax, But...
India abolished estate duty in 1985, and as of now, there is no direct inheritance tax applicable on the transfer of assets upon death. However, this does not mean inheritance is tax-free in effect. Several indirect tax implications may arise:
- Capital Gains Tax: Beneficiaries are not taxed at the time of inheritance, but if they later sell inherited assets (e.g., property, shares), capital gains tax applies on the differential between the sale price and the cost to the original owner (indexation permitted) (But from Budget 2024 announced significant changes in long term capital gain from sale of property tax. Under the new rule, the LTCG tax rate is reduced to 12.5%, but the indexation benefits is removed for the investors who buy the property after 23rd July, 2024.
- Income from Inherited Assets: Rental income, dividends or business income from inherited assets are taxable in the hands of the inheritor.
- Gift Tax Provisions: While inheritance is exempt under Section 56(2)(x) of the Income Tax Act, gifts to non-relatives or cross-border transfers may still trigger tax exposure.
- International Considerations: For Indian HNIs with foreign citizenship or assets abroad, inheritance may attract estate tax in jurisdictions like the USA, UK or Japan.
Hence, the absence of a direct inheritance tax in India does not rule out the need for tax planning, particularly for families with complex, cross-border assets.
2. Legal Tools for Succession and Inheritance Planning
To ensure a legally sound and tax-optimised transfer of wealth, high-net-worth families should consider implementing the following instruments:
a. Will and Testament
A properly executed will remains the most fundamental legal document for inheritance planning. However, for HNIs, mere execution of a will may not suffice due to:
- Probate requirements leading to public disclosure and delays.
- Potential legal challenges by disgruntled heirs.
- Cross-border estate complexities.
Thus, a will must be part of a larger estate strategy.
b. Private Family Trusts
Creating a private trust is among the most robust mechanisms for long-term wealth preservation and tax efficiency.
- Revocable or Irrevocable Trusts: Irrevocable trusts are preferred for asset protection, estate tax mitigation (especially in foreign jurisdictions), and creditor shield.
- Discretionary vs. Determinate Trusts: Discretionary trusts allow flexibility in asset distribution among beneficiaries, giving trustees discretion in timings and amounts.
- Taxation of Trusts: Taxed either as an individual or as an Association of Persons (AOP) depending on structure. If income is distributed, beneficiaries pay tax in their individual capacity.
Trusts also facilitate intergenerational wealth transfer without attracting gift tax and ensure confidentiality.
c. Family Business Structuring
HNIs owning family-run enterprises should focus on proper legal structuring for seamless business succession:
- Holding Companies or LLPs to consolidate ownership.
- Shareholder Agreements to govern transfer, voting rights, and exit strategies.
- Family Constitutions for guiding principles and dispute resolution mechanisms.
These ensure business continuity and mitigate inheritance-related disputes.
d. Gifts and Partition of HUF
Under Hindu law, ancestral assets forming part of a Hindu Undivided Family (HUF) can be partitioned among coparceners. Gifting during the lifetime, particularly movable assets, is also a legitimate tax planning tool if aligned with Section 56 exemptions.
e. Life Insurance as a Tool
HNIs may consider high-value life insurance policies (especially term or ULIPs) not just as a risk coverage tool but as a liquidity instrument to meet estate liabilities, including taxes in foreign jurisdictions.
3. Cross-Border Inheritance Considerations for HNIs
With increasing global mobility and offshore investments, Indian HNIs often face complex legal and tax issues in multiple jurisdictions. Proactive planning can help mitigate double taxation, delays, and legal complications.
a. Estate Taxes in Foreign Jurisdictions
Countries such as the United States, United Kingdom, Japan, and France levy estate or inheritance taxes on worldwide assets or on assets located within their territory. Key issues include:
- US Citizens or Green Card Holders: Subject to U.S. estate tax up to 40% on worldwide assets above the exemption limit (~USD 13.6 million for 2024).
- UK Domicile: Subject to inheritance tax at 40% on estates above GBP 325,000, even for assets outside the UK.
- NRIs and Foreign Assets: If an Indian resident inherits foreign property, local probate laws apply. Similarly, if an Indian resident dies owning property abroad, local tax and succession laws in that country may apply before Indian succession kicks in.
b. Use of Offshore Trusts and Foundations
For Indian HNIs with foreign assets, offshore trusts or family foundations in jurisdictions like Singapore, Dubai (DIFC), or Mauritius may be explored, subject to:
- Tax Residency and Reporting: Foreign assets held via offshore entities must be disclosed under the Black Money Act, 2015.
- FEMA & RBI Approvals: Transfer of funds or property abroad must be compliant with Liberalised Remittance Scheme (LRS) and other RBI norms.
- GAAR Implications: General Anti-Avoidance Rules under Indian law may apply if structures are seen as primarily for tax avoidance.
Hence, cross-border planning must be undertaken with expert legal and tax advice, ensuring alignment with Indian as well as foreign laws.
4. Legal Safeguards to Avoid Future Litigation
Inheritance disputes in India, particularly among HNI families, are common and often result in prolonged litigation. Legal foresight can prevent such complications:
- Clear Legal Documentation: All estate planning instruments—will, trust deeds, shareholder agreements—must be executed correctly with witnesses, notarisation, and, where necessary, registration.
- Periodic Updates: Estate plans should be reviewed periodically, especially after major life events (marriage, divorce, births, business sale, etc.).
- Conflict Avoidance Mechanisms: Setting up family councils, mediation clauses, or involving neutral third-party trustees can prevent future legal battles.
Preventive legal compliance adds not only legal robustness to the estate plan but also enhances family harmony.
5. Anticipating the Return of Inheritance Tax in India
While India currently has no inheritance or estate tax, there have been periodic policy debates about its reintroduction to address widening inequality and boost fiscal revenues. High-net-worth families must be future-ready:
- Scenario Planning: Estate strategies should factor in a potential future estate tax regime with grandfathering provisions.
- Trust Formation Ahead of Time: Transferring assets to irrevocable trusts before a tax regime kicks in may offer insulation.
- Structuring Holding Entities: Consider establishing long-term vehicles such as family investment companies or LLPs with proper succession frameworks.
Conclusion
Inheritance tax planning is not merely a financial exercise—it is a strategic legal imperative for high-net-worth individuals in India. Although the country currently does not impose an inheritance tax, Indian laws around capital gains, income tax, foreign exchange, and black money reporting demand rigorous compliance and foresight. For families with significant domestic and international holdings, building a legally compliant and tax-efficient estate plan through instruments like wills, trusts, and structured family businesses is crucial.
Further, with the global trend leaning toward wealth taxation and India's own economic imperatives, the possible return of estate duty cannot be ruled out. The prudent approach for HNIs is to act early, consult legal and tax advisors, and establish robust inheritance structures that preserve wealth across generations, while maintaining full regulatory compliance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
