Hotmail's Sabeer Bhatia wants 55% inheritance tax in India: What happens to your wealth?

What happens when the wealth you inherit becomes taxable? Sabeer Bhatia's 55% inheritance tax proposal has brought the question into focus, particularly for families passing on homes, savings and businesses.

In Short

• Sabeer Bhatia suggests 55% inheritance tax to boost India's competitiveness
• High exemption needed to protect middle class and primary family homes
• Tax might change wealthy families' succession plans and affect entrepreneurship

Hotmail co-founder Sabeer Bhatia has suggested that India should consider a 55% inheritance tax if it wants to become a more competitive nation. In a recent post on X, Bhatia wrote, “If India wants to become a truly competitive nation, it should consider a 55% inheritance tax. Opportunity should come from what you build-not simply from what you inherit.”

In the same thread, Bhatia also said, “You don’t make your kids weak by building for them. You give them the tools to succeed, like education and good values. You don’t give them wealth. You weaken them when you give them wealth.”

But what would a 55% inheritance tax actually mean for Indian families? To understand whether such a tax could work in India and how it might affect the common man and the middle class, IndiaToday.in spoke to Abhishek Kumar, Sebi-registered investment adviser and founder of Sahaj Money, and Nishant Shanker, Tax Controversy and Dispute Resolution, Navraj Global Advisors.

WHAT COULD AN INHERITANCE TAX ACHIEVE?

An inheritance tax is charged on wealth or assets passed on to heirs after a person's death. Supporters of such a tax argue that it could help reduce the concentration of wealth among a small number of families.

Kumar said an inheritance tax could, at least in theory, help address the growing gap between those who inherit large fortunes and those who do not.

“On paper, inheritance tax could help in curbing extreme wealth concentration and promoting a more equitable distribution of resources by preventing inherited dynastic fortunes from widening the economic divide,” he said.

He added that the tax could also create an additional source of revenue for the government, which could be used for public infrastructure, healthcare, education and welfare programmes.

Shanker also said a well-designed inheritance tax could help reduce the concentration of wealth across generations.

“It could also promote greater equality of opportunity by ensuring that very large inherited fortunes are taxed when they pass from one generation to another,” he said.

WOULD THE MIDDLE CLASS BE AFFECTED?

This is perhaps the biggest concern for ordinary families. If India were to introduce an inheritance tax, the threshold at which it kicks in would determine how many people actually fall under it.

Kumar said a high exemption threshold would be important to ensure that families passing on modest savings or a primary home are not burdened.

“Protecting the middle class would require a high initial exemption threshold that would shield families with modest estates, modest savings and primary family residences from taxation,” he said.

He added that these limits should also be linked to inflation and property prices.

“This would ensure that average families passing down a single home or ordinary savings are not forced into distressed liquidation to pay for inheritance tax,” Kumar said.

Shanker also favoured a sufficiently high threshold.

“The tax should ideally apply only above a sufficiently high threshold, so ordinary inheritances are not affected. A reasonable exemption for a family home and modest financial assets could protect middle-class families,” he said.

He added that the tax could rise progressively as the value of the inheritance increases.

WHAT HAPPENS TO THE FAMILY HOME?

For many Indian families, a house is likely to be among the biggest assets passed on to the next generation. But unlike cash or listed investments, a house cannot always be easily sold or divided to pay a tax bill.

Kumar said safeguards would therefore be needed.

“Safeguards should include generous baseline tax-free allowances, targeted exemptions and specialised relief clauses for primary residential properties,” he said.

He also suggested deferred payment structures and instalment plans so that heirs do not have to immediately sell an inherited asset to pay the tax.

Shanker said similar provisions would be needed for assets that are difficult to sell.

“A high basic exemption, progressive rates, protection for a primary residence within reasonable limits and instalment facilities could help,” he said.

“There should also be clear rules for assets that are difficult to sell, such as family businesses, farms or certain properties,” Shanker added.

FAMILY BUSINESSES COULD FACE A CHALLENGE

The impact could be more complicated when the inheritance involves a family-run business.

A company or business may have a high valuation but may not generate enough cash for the heir to immediately meet a large tax liability. In such cases, the heir may have to borrow money or sell part of the business.

“A steep inheritance tax rate could indeed severely disrupt small and medium-sized enterprises as heirs might be forced to sell or liquidate core business assets to settle the tax liability,” Kumar said.

Shanker also flagged this as a significant concern.

“A family business may have substantial value but limited cash. If heirs suddenly face a large tax bill, they may have to borrow money or sell part of the business to meet the liability,” he said.

He added that deferred payment and instalment options could help genuine family businesses manage such liabilities.

WOULD WEALTHY FAMILIES CHANGE THEIR SUCCESSION PLANS?

A 55% inheritance tax could also change how wealthy families plan their finances and transfer assets to the next generation.

Kumar said ultra-high-net-worth families could look at trusts, philanthropic foundations and corporate holding structures as part of their wealth planning.

“Ultra high net worth families would likely restructure their wealth accumulation strategies by heavily utilising trusts, philanthropic foundations, and corporate holding structures to bypass personal estate transfers,” he said.

He also said a high tax could encourage some wealthy individuals to move their capital or residency to countries with more favourable tax regimes.

Shanker said wealthy families could become more focused on succession planning during their lifetime.

“They may consider gifting, trusts, family arrangements and other legitimate estate-planning structures. A high rate could therefore significantly change how large family fortunes are transferred between generations,” he said.

COULD IT AFFECT INVESTMENT AND ENTREPRENEURSHIP?

While an inheritance tax could potentially reduce the concentration of inherited wealth, experts also pointed to possible unintended consequences.

Kumar said a high tax could discourage long-term savings and entrepreneurial activity.

“While on one side it could help in creating a level playing field by reducing unearned inherited advantages, on the other hand it could backfire by discouraging long-term savings and entrepreneurial drive,” he said.

He also flagged the possibility of capital moving out of India and wealthy families using more complex structures to manage their assets.

Shanker highlighted several other challenges, including tax avoidance, capital flight, valuation difficulties and the administrative burden on the government.

For example, putting a value on private companies, jewellery, land or other illiquid assets can be difficult and may lead to disputes between taxpayers and authorities.

There could also be concerns around double taxation if the assets being inherited had already been subject to income tax or capital gains tax during the owner's lifetime.

INHERITANCE TAX VS EXISTING TAXES

Another question is whether India needs a new inheritance tax or whether existing taxes on income and capital gains should be strengthened.

Kumar said an inheritance tax would address a different issue.

“Taxing inherited wealth directly targets accumulated intergenerational disparities that routine income and capital gains taxes fail to capture,” he said.

However, he added that combining moderate inheritance measures with stronger enforcement of existing capital gains and tax compliance rules could offer a more balanced approach than relying heavily on a single tax.

Shanker also said the taxes serve different purposes.

“Income tax applies to earnings, while capital gains tax applies when certain investments or assets are sold at a gain. An inheritance tax would target the transfer of accumulated wealth between generations,” he said.

Therefore, he said, an inheritance tax could complement existing taxes rather than necessarily replace them.

In other words, whether India needs an inheritance tax remains a larger policy question, but experts agree that its design would be crucial. Much would therefore depend on the exemptions, thresholds and safeguards built into the system.

- Ends