Inheritance Tax in India

Let us look at how HNIs use term insurance to manage future inheritance tax liabilities, ensure estate liquidity, and protect their family's financial future.

What is Inheritance Tax?

An inheritance tax is a type of tax imposed on the beneficiary (recipient) of an estate. This means that the person who is receiving assets from a deceased person may be responsible for paying it. Although India does not currently impose an inheritance tax, there have been ongoing discussions about its reintroduction, similar to global practices. In the past, India had an Estate Duty Act until 1985, which taxed the transfer of wealth upon death.

What are the Key Points to Keep in Mind by HNIs:

• HNIs often prepare for global tax trends, including the possibility of estate duties.

• Inheritance taxes can significantly reduce the value passed on to heirs.

• Global Indians with assets abroad may already be subject to such taxes.

• Succession planning becomes complex without liquidity in hand.

• Term insurance is a ready pool of funds, should any such law return.

Can Term Insurance Help with Inheritance Tax?

Yes, term insurance can be an effective tool to manage potential inheritance tax liabilities in India, especially for High Net-Worth Individuals (HNIs). While India does not currently levy an inheritance tax (it was abolished in 1985), the possibility of its reintroduction, has been a subject of policy debate. Moreover, HNIs with global assets may be subject to estate taxes in other jurisdictions such as the U.S., the U.K., or Canada.

How Term Insurance Helps Manage These Risks? 

Here’s how term insurance plays a role in managing such risks:

• Provides Liquidity: If inheritance or estate taxes are reintroduced or apply in a foreign jurisdiction, term insurance provides an immediate tax-free payout, ensuring heirs don’t have to liquidate assets to cover dues.

• Safeguards Real Estate & Businesses: In case of large real estate holdings or business assets, insurance proceeds help pay potential tax obligations without forcing the sale of property or equity.

• Supports Cross-Border Estate Planning: For HNIs with global wealth, a term policy can act as a financial buffer for beneficiaries who may face estate taxes in foreign countries.

• Wealth Equalisation Among Heirs: If certain heirs are expected to inherit taxable assets while others receive liquid ones, the term plan can help balance out the financial impact by providing a fixed sum to the former.

• Future-Proofing Legacy Planning: As estate taxation policies evolve globally and potentially in India, term insurance remains a flexible, low-cost solution to shield your legacy from unexpected financial liabilities.

Why HNIs Prefer Term Insurance for Estate Planning?

Term insurance isn't just for income replacement; it's a smart legacy tool. HNIs use high-value term insurance to help with estate planning to ensure that their heirs don't need to liquidate real estate, equity holdings, or businesses to meet sudden financial obligations.

Benefits for HNIs:

• Estate Liquidity: Term insurance provides an immediate, tax-free lump sum payout, which can be used to settle legal costs, potential estate taxes (in applicable jurisdictions), or other financial obligations that may arise upon the policyholder's death.

• Asset Protection: Without ready cash, heirs may be forced to sell property, shares, or other assets, sometimes at undervalued prices. Term insurance ensures they have access to funds without prematurely liquidating valuable assets.

• Loan Clearance: If the estate includes properties or assets tied to loans, the term insurance payout can help settle these debts, thus protecting the collateralised assets from being claimed by lenders.

• Family Business Continuity: In the event of the policyholder's demise, the insurance payout can support the ongoing operations of a family-run business, preventing disruption and allowing a smoother leadership transition.

• Wealth Preservation: Term insurance helps preserve the integrity of the estate, ensuring that wealth is passed down to the next generation as intended, without being eroded by financial liabilities or forced asset sales.

How Term Insurance Works for Inheritance Planning?

HNIs typically choose large sum-assured term insurance for HNIs (₹2 Cr–₹15 Cr or more) with long policy durations to align with their wealth preservation goals.

Here's how it works.

Step 1: You buy a term insurance plan with a high sum assured.
Step 2: In case of your untimely demise, the nominee receives a tax-free lump sum.

Step 3: The funds can be used to pay estate taxes, settle loans, or fund legal formalities.

Step 4: This avoids the need to liquidate high-value or illiquid assets.

Step 5: Riders like critical illness or accidental death can be added for enhanced protection.

Who Should Consider Buying Term Insurance for Inheritance Planning?

HNIs are a diverse group, and not every wealthy individual faces the same financial complexities. However, term insurance is ideal for:

• HNIs with significant real estate holdings in India or abroad.

• Business owners who are looking to ensure smooth succession planning.

• Global Indians with exposure to inheritance tax in other countries (e.g., the UK, US).

• Families with multiple heirs, where the division of property could create friction.

• Individuals with high-value loans, such as luxury real estate or business debt.

Comparing Term Insurance vs. Other Inheritance Tools

HNIs often use a combination of tools for succession planning, such as trusts, will creation, and holding companies. Here's how term insurance compares:

Is It Better to Use Term or Whole Life Insurance?

HNIs sometimes compare term insurance with whole life insurance. While whole life offers lifelong coverage and cash value, term insurance is more efficient when the goal is simple: cover high-value risk at minimal cost.

Why HNIs Choose Term Insurance Plans?

• Cost-Effective Coverage: Term plans offer high sum assured at comparatively low premiums, making them an efficient way to secure significant financial protection.

• Uncomplicated Financial Tool: Unlike investment plans, term insurance is straightforward, focused purely on protection without investment-linked complexities.

• Liquidity and Investment Freedom: Since term plans don't lock in funds into low-yield instruments, HNIs can allocate their capital to higher-return investments.

• Strategic Financial Flexibility: With no rigid long-term commitments or charges, term insurance aligns well with dynamic wealth strategies and evolving estate goals.

• Tax-Efficient Legacy Planning: The death benefit from a term policy is tax-free under Section 10(10D), offering a clean and efficient wealth transfer tool for heirs.

Can NRIs Also Use Term Insurance for This Purpose?

Yes. NRIs (including OCI/PIO holders) with Indian assets can buy term insurance for NRI in India, subject to standard underwriting and KYC norms. It allows them to:

• Protect Indian real estate and business interests.

• Cover Indian legal costs or potential estate taxes.

• Provide their Indian heirs with tax-free death benefits.

They can even use online term insurance calculators to estimate coverage and compare plans efficiently.

Wrapping it Up!

HNIs understand that true legacy planning goes beyond wealth creation; it’s about ensuring smooth, conflict-free transfer of wealth. As the landscape of Indian taxation and global financial regulation evolves, the foresight to use term insurance becomes even more vital. By securing a well-structured term plan today, you guarantee that your family inherits not just wealth, but peace of mind, continuity, and financial dignity. If you are an HNI or NRI with Indian interests, speak to a financial advisor or explore term insurance plans tailored for high-value protection.