January 26, 1954

Estate Duty and Life Insurance T Bagchee

Though the author is a member of the Scottish Institute of Actuaries and is an insurance expert with years of experience of both life and general insurance companies, his lucid explanation of estate duty covers much wider ground than the title suggests.

Insurance cover for estate duty is brought in only incidentally, though it is discussed fully, as a help in the financial adjustment that every property holder will have to make for payment of estate duty, before he can go to heaven.

LO O K after the life duties and the death duties must look

after themselves "—this sentiment w i t h which most people wi l ly-ni l ly agreed received a rude shock when the Act No. 34 of 1953—otherwise known as the Estate Duty Act—was passed by the Parliament. To the vociferous protests from various quarters at the imposition of another burden, the Finance Minister replied that such a duty was an essential feature in modern fiscal system of the wor ld and there was nothing unusual in India falling in line w i t h other countries. Finally, he clinch­ed the argument w i t h the somewhat cryptic advice to those who have money to " pay estate duty and go to heaven ". The Estate Duty Act has been designed mainly to augment the revenue of the State by taxing the rich and incidentally to remove to some extent inequalities in income and wealth. In a statement made in the House of People, the Finance Minister expressed the hope that u in the long run the socio-economic con­sequences w i l l be more important than the financial results".

Primarily meant for the wealthy who leave behind them a handsome competence, the scope of the Estate Duty Act is wide and its provisions are somewhat intricate even for the legal mind to comprehend. It is, however, proposed here to confine our observations on the effects of Estate Du ty Act on life insurance business and examine how life i n ­surance policies can be utilised to provide for the estate duty.

A sort of death duty was first levied in Bri tain in 1796 on proper­ties changing hands on death and in successive stages, these duties be­came, through piecemeal legislations, an integral part of the fiscal system. The first serious attempt to codify the provisions of death duty was made through the Finance Act of 1894. T h e provisions and levies of death duties were modified in sub­sequent Finance Acts f rom year to year to meet the changing economic conditions. The Ind ian Estate

Duties Act has been drafted as a separate piece of legislation on the lines of similar provisions of the British Finance Act , w i th such modi­fications as were necessary particu­larly to meet the requirements of the various laws of succession in force in India . Compared to the enact­ments of other countries, the Indian Estate Duty Act appears to be libe­ral, particularly in regard to statu­tory exemptions and rates of duty.

ESTATE DUTY—A MUTATION DUTY

Estate duty has been defined in an explanatory booklet on the sub­ject issued by the Central Board of Revenue as a " Muta t ion Duty " which takes no account of family relationship or destination of pro­perty passing or changing hands on death of a person. Under section 2 (15) of the Act , property which passes on death includes "any interest in property, movable or immovable, the proceeds of sale thereof and any money or investment for the time being representing the proceeds of sales and also includes any property converted from one species into another by any method." It is clear from this definition that all movable and immovable pro­perties including those falling wi th in the category of choses in action are deemed to pass on death of a person and are dutiable. There are certain statutory exemp­tions and reliefs where no duties are charged although the values are taken into account in aggregating for determination of the rate of duty and certain allowances arc made against payments of such duties.

PROPERTY DEEMED TO PASS

There are certain properties which do not actually pass on death of an estate holder but in the Act these have been included in an Explana­tory Note to section 2 (15) of the Act " as deemed to pass" for the purpose of levy. These include:

(1) Gifts in contemplation of death, that is, donatio mortis causa, and gifts made between l iv ing per-

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sons inter vivos w i th in a prescribed time l imi t .

(2) Monies payable under life insurance policies and annuity con­tracts effected by the deceased and kept by h im for the benefit of a nominee or assignee.

(3) Assets of a company control­led by not more than five persons where the deceased made a transfer of his interest in the company and obtained benefits w i t h i n a prescribed period.

In this connection, i t w i l l be of interest to note section 55 of the British Finance Act, 1940, which came under severe criticism in the British Parliament in the closing stages of the debate on the Finance Act, 1953, particularly on account of lack of means to find out the correct market value of the assets of the deceased in a private com­pany. This section is intended to prevent evasion of duty, but it is somewhat loosely worded and in the absence of special provisions, the value set on the shares held by the deceased in a private company would be lower than the actual value they represent. There are quite a number of cases on record where the ful l levy of duty was evaded by the deceased by transferring their assets into private companies over which they retained control. The method of valuing quoted assets is simple and definite; the Stock Ex­change list is the authority. But shares in a private company can be valued arbitrarily after an argu­ment between the Estate Duty Offi­cer and the executors of the estate. In a recent case: In re: Holt, de­ceased, brought before the Chancery, Mr Justice Danckwater valued the shares of Holt 's assets in his com­pany at 19s each against 84s and 17s '2d each valued respectively by the Estate Duty Officer and the execu­tors. The Chancellor of the Ex­chequer announced at the debate that he had " started a review of the death duties and particularly of the said anomalies that are said to arise in cases of section 55 of the Finance Act, 1940",

January 26, 1954 THE ECONOMIC WEEKLY

EXEMPTIONS The Estate Duty Act, 1953, is

generous and liberal in the matter of exemptions and compares favour­ably wi th similar provisions in Br i ­tish Finance Act. The Finance Act of Great Britain exempts estates not exceeding £2,000 in value from pay­ing duty. But the Indian Act. ex­empts duty in the case of a joint H indu family estates not exceeding Rs 50,000 in value and other estates not exceeding. Rs 1 lakh in value. Besides, there are several other classes of property enumerated below which are exempt from estate duty under section 33 of the Act.

(1) (a) Gifts mortis causa: gifts of property up to the value of Rs 2.500 made within six months before death to any public charity.

(b) Gifts inter vivon: gifts of pro­perty up to the value of Rs 1,500 made for any other purpose wi th in two years be-fore death.

(c) Household goods, tools, im­plements, etc, not exceeding the value of Rs 1,500.

(d) Books not intended for sale. (c) Wearing apparel excluding

those studded with stone or with gold and silver embroi­dery.

(f) Monies payable under life in­surance policy or policies effected by the deceased on his life and assigned to the Gov­ernment for payment of estate duty but not exceeding Rs 50,000.

(g) Monies deposited wi th the Government for payment of estate duty but not exceeding Rs 50,000.

(h) Monies payable under one or more life insurance policies effected by the deceased on his life to the extent of Rs 5,000.

(i) Drawings, paintings, objects of art, manuscripts, scientific collections, etc, of historical and national value, which are retained by the family or dis­posed as per the direction of the Central Board of Re­venue.

(j) Drawing, painting, etc, or any other heirloom not falling wi th in the clause (i).

(k) Monies earmarked under policies of insurance, declara­tions or trusts effected by the deceased parent or natural guardian for marriage of his female relatives dependent upon h i m to the extent of

Rs 5,000 for each such rela­tive.

As explained by the Finance M i ­nister, the exemption under (j) above is meant to be an alternative, and not an addition to (f) to serve those persons who are uninsurable.

SPECIFIC ALLOWANCES, RELIEFS AND REBATES

The Act provides certain specific, allowances, rebates and reliefs on the duties payable so that unneces­sary hardships may not be caused to the persons who benefit by the death of the original estate holder. The following are the important allow­ances, etc, given in the Act :

(1) In determining the value of the estate, allowance shall be made for reasonable funeral expenses not exceeding Rs 1,000 and certain bona fide debts and encumbrances (sec­tion 44) .

(2) No duty wi l l be levied in res­pect of limited life interest of a widow governed by H i n d u law devolving on her hus­band's death, provided the widow dies wi th in seven years from her husband's death and her interest devolves upon a reversionary (section 32) .

(3) In case of quick succession the estate duty payable on the same property wi th in five years from the date of the first death, w i l l be reduced according to a prescribed scale (section 31).

In Great Britain no death duty is charged on the death of the heir occurring within three months after the first death. For any death occur­ring thereafter, the legal heirs to the estate are required to pay death duty at the full rate. The provisions made in the Indian Act in this re­gard are not liberal enough, looking to the high rate of mortality prevailing here.

(4) In case of a property consist­ing of agricultural lands where the principal value of the estate does not exceed Rs 2 lakhs, the duty w i l l be reduced by 25 per cent (sub­section 3 (a) and (b), sec­tion 35).

In a country where the majority of the people depend upon agriculture the opt imum l imi t for agricultural property should have been kept at a lower level so that the bene­fit would extend to the com­

mon man. This provision is somewhat irrational in view of the current movements of Bhoodan Yagna which is gain­ing in popularity and aboli­t ion of Zamindari , sponsored by the state governments.

(5) The cost of administering or realising foreign properties not exceeding 5 per cent of the value of property w i l l be allowed to be deducted from the principal value of the estate, (section 48) .

(6) In case of any property pass­ing on death of an estate holder situated in a non-reci­procating country, the allow­ances w i l l be made for the amount of estate duty if any paid in that country subject to rules made by the Central Board of Revenue for this purpose (section 49) .

(7) The amount of estate duty payable w i l l be reduced by an amount of court fees paid in obtaining probate, letters of administration or any succes­sion certificate in respect of property on which estate duty is leviable (section 50) .

AGGREGATE VALUE In order to determine the rate at

which the estate duty is to be levied, all properties changing hands on demise of an estate holder arc to be aggregated, subject to certain exemp­tions, so as to form ' one ' estate. The. following are principal items of property which are to be taken into account to find aggregate value and the rate of duty but are not to be taxed.

(1) Any agricultural property situated in a State which has not agreed to Central Government legis­lation on estate duty.

(2) Property on which no estate duty is leviable under sections 32 and 35 of the Act , eg, the interest of H indu widow devolving upon rever­sioners, property of a joint H indu family governed by Mitaksharas, Marumakkattayam, or Aliyasana-tana laws of the value of Rs 50,000 and property of any other k ind to the value of Rs 1 lakh.

The values of the following pro­perty which are exempt under sec­t ion 33 of the Act from estate duty are not to be aggregated.

(1) Property in which the deceas­ed had never any interest.

(2) Household goods including tools of trade, implements, etc, to the extent of Rs 25,000 (section 33 (c) ).

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January 26, 1954 THE ECONOMIC WEEKLY

(3) Books not intended for sale (section 33 (d ) ).

(4) Wearing apparel but exclud­ing those having precious stones or ornaments sewn into (section 33 (e) ).

(5) Drawings, paintings, objects

of art, rare manuscripts of historical and national value retained or sold or disposed as per direction of Central Board of Revenue (section 33 ( i ) ).

(6) Drawings, paintings, etc, or

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any other heirloom not fal l ing under (5) above and retained by the family (section 33 ( j ) ) .

RATES OF DUTY

The prescribed rates of estate duty shown in Table I arc taken from the Second Schedule (Parts ( i ) & ( i i ) to the Act .

As the rates have been incor­porated in the Act itself, it is clear that the rates are to be retained for some length of time unt i l it is found necessary to amend the Act. It may be noted that the Act does not confer any power to alter or modify the rates to Central Board of Revenue or the Controller of Estate Duty.

Compared to the prevailing rates of death duties in other countries, the rates prescribed in Indian Act appears to be moderate and station­ary in character, ie, not to be chang­ed through Finance Acts every year. Further, the rates have been based on " slab " system and not " stepped up " as in Great Bri tain. Therefore the total duty payable under the Indian Act wi l l work out at a lower figure than the corresponding duty in the " step " system. The compa­rative figures in Table II prove that the net rate of duties imposed in India are definitely moderate and not likely to cause undue hardship to the people.

In working out the scales of duty, distinction has been made in the rates for two major classes of pro­perties, viz, (I) interest in joint family property governed by the Mitakshara, Marumakkattayam or Aliyasanatana school of H indu law, and (a) interest in property of any other kind. The limits of non-duti­able estates have been fixed by the Act respectively at Rs 50,000 and Rs 1 lakh for the above purposes. The object of making a distinction

between these two classes of property is not very clear. However, it appears that the differential limits of exemp­tion of duty have been arbitrarily imposed keeping in view the fact, that, property of a joint Hindu family governed by the Mitakshara and allied laws is deemed to pass on survivorship to the extent of the in ­terest of the co-parcenary only. Whereas in the Dayabhaga, Mayu-kha and other systems it passes in full on account of sole ownership of the estate holder. In other words the property of an individual under the Mitakshara law does not exclu­sively belong to h im but he has to share it w i th the members of the jo int family. Therefore, the right of

January 26, 1954

ownership in the share of such a property devolves upon a person from his very bir th . In the event of death of a person, the duties are payable on his share of the joint family. In the Dayabhaga and other systems, a person becomes the owner of an estate not by bi r th but by survivorship only. The entire estate left by the deceased under the Dayabhaga system forms the corpus and becomes dutiable. The exemp­tion l imi t in such cases has been fixed at double the l imi t allowed for inheritance in Mitakshara law.

AVERAGE RATES The rate structure of estate duty

has been based on the slab system and therefore it is necessary to deter­mine the average rate of duty on the assets passing as a whole and apply that rate to the estate after deduc­tion of the exemptions allowed under section 32 of the Act . The average rate means the quotient obtained by dividing the total estate duty by the principal value. Table TIT shows at a glance the average rates of duty on the assets of different values, calculated according to the directions contained in the ' H i n t s on Estate D u t y ' issued by the Cen­tral Board of Revenue, Ministry of Finance.

LIFE INSURANCE AND ESTATE DUTY

The fact that life insurance pro­vides an excellent and indeed, obviously, the only nicely adjusted way of covering estate duties is well known and it is, therefore, clear that a good scope exists for development of life insurance as a means of providing for estate duties.

Under section 74 of the Ar t , the estate duty payable forms the first charge on the movable and immov­able property of the deceased, sub­ject to the provisions for allowable rebates and incumbrances. When an estate holder dies, unless the value of his belongings is low, estate duties must be paid to the Controller before any one can touch any part of the estate. A large estate, especially if it coin-prises land or other properties not easily realisable, may be crippled by these demands unless payment of duties is arranged in advance. And even in case of smaller estates considerable inconvenience can be avoided by using life insurance for this purpose. Policies issued for estate duties contain a special pro­vision that the amount of the sum assured or as much of it as may be necessary for the purpose wi l l be

paid by the company on death of the assured direct to the Controller of Estate Duty, thus avoiding costly liquidation or borrowing and im­mediately freeing the estate. The provisions for covering the estate duty through life insurance has been liberalised by section 33 of the Act which lays down that the policy or policies on the life of the deceased and effected by him w i l l not attract duty provided: (1) the sum assur­ed does not exceed Rs 50,000 and (2) the policies are assigned to the Government for the purpose of pay­ing estate duty. There are certain other concessions embodied in the Act under which life insurance policies effected by the deceased on his life and policies earmarked to meet the marriage expenses of his dependent female relatives, etc, are not dutiable. These concessions are valuable from the point of view of a life insurance agent and it is hoped that full advantage of the concessions w i l l be taken by insur­ance companies to make a certain (lass of the people insurance-minded.

Generally speaking, life insurance policies form part of the estate un­der the Act but there are conces­sions described below where such policies do not increase the liable estate:

(1) Under section 3 3 ( h ) life i n ­surance policies up to Rs 5,000 sum assured effected by the deceased on his life are not dutiable.

(2) Life insurance policies up to

Rs 50,000 taken for the purpose of payment of estate duties and as­signed in favour of the Govern­ment are not dutiable (section 33

(3) Lite insurance policies up to Rs 5,000 sum assured effected by the deceased on his life and ear­marked for marriage of any of his female relatives dependent upon h im are free of duty (section 33 ( k ) ) .

(4) Under proviso to section 35 it has been laid down that any pro­perty passing on the death of a person in which the deceased never had an interest w i l l not be aggre­gated wi th any other property but assessed as an estate by itself and the estate duty shall be levied at the rate applicable on the principal value of such estate.

Thus a life insurance policy which is taken out by the deceased and given away as a gift assigned unconditionally and absolutely to any one w i l l be assessed separately for duty and consequently duty payable on the same w i l l be nomi­nal. Policies of insurance taken out by the deceased for the absolute benefit of wife and/or children un­der section 6 of the Marr ied Wo­men's Property Act. 1874 wi l l fall under this category and the estate created by such a policy shall be assessed as a separate estate by i t­self, and shall, thus, attract a lower rate of duty.

There is. however, one difficulty from the point of view of the in-

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sured in taking out a policy for the benefit of his wife and children by naming them as beneficiary in that the husband loses control over such polity from the inception and in the event of the wife predeceasing, complications may arise as to the ownership of such policy. Normally the sum assured under such a policy creates a trust in favour of the beneficiary and the amount vests to the trustees, if the beneficiary dies before the ..maturity of the same.

(5) Under section 9 of the Act immediate gifts inter vivos of any laid down in clauses (a) and (b) of sub-section 33 of the Act. The special relief in the rate of estate property (including life insurance policy made bona fide any time two years or more before the death of a person) is treated as property deemed to pass and is liable for duty except, however, those made in accordance with the provisions duty granted to the policies given away unconditionally and absolutely to the wife under the Marr ied Wo­men's Property A r t , 1874 stated in (4) above is not applicable to the gifts inter vivos made to any one.

Under section 14 of the Act, a policy kept up for a donee is treat­ed as property deemed to pass and is dutiable. The death duties for gifts made inter vivos under sections 9 and 14 of the Act can, therefore, be covered by taking temporary assurance for the required amount for shorter terms.

(6) Life insurance policies effect­ed by the deceased exclusively for the purpose of providing for the marriage expenses of an unmarried female relative dependent on h im for the necessaries of life to the ex­tent of Rs 5,000 sum assured for each such relatives are under sec­tion 33(k) free of duty. If such a policy is issued under section 6 of the Marr ied Women's Property Act for the benefit of an unmarried daughter, it w i l l not be assessed as a separate estate as stated in (4) above, but it wi l l not be taxed pro­vided the object of insurance is embodied in the policy.

(7) Joint Life Policies: Policies of assurance are frequently issued on the lives of husband and wife and occasionally on the lives of per­sons who are partners in business. In the former case, the premiums are usually paid by the husband and it is probable that such pro­perty will not be dutiable on sur­vival of wife. In case where a policy [issued covering a risk of two per­

sons who are partners in business and where premiums are pa id from the income of the business, it ap­pears that the policy money w i l l be subject, on death of one of the partners, to duty in proportion the deceased partner contributed to the premiums.

ESTATE DUTY POLICIES

The Act provides that policies of life insurance to the extent of Rs 50,000 sum assured for effected by the deceased and assigned to the Government for the purpose of pay­ing the estate duty w i l l not be tax-eel. This is indeed a very important concession to the leading indus­trialists, landholders, businessmen and to the top-ranking professionals such as lawyers, doctors, etc. It may be added here that no such concession is allowed under the British Act where the polities taken out for payment of death duties rank as dutiable properties. To keep the cost of such insurance at a low level, a whole-life insurance policy with premium ceasing, say, at age 80 years, without participat­ing in profits, is eminently suitable for the purpose. It is, however, necessary to determine carefully at the outset the approximate sum which may be required to pay the duty on death, so that the amount of assurance can be fixed. In case where the amount of duty is ex­pected to exceed Rs 50,000 a policy can be taken out for the bigger sum and in that case, left over Rs 50,000 wi l l be taxed. I n case of gifts made inter vivos before the period of two years from the date of death, addi­tional duties on such gifts where the liability can be covered by tak­ing term assurances year to year.

It may be noted that the policies expressly taken for meeting death duties are required to be assigned to the (Government from the in­ception or at least the object of insurance is to be embodied in the policy. It is expected that the Central Board of Revenue1 wi l l frame rules and set forth the draft of endorsement to be executed on such policies

AN EXAMPLE

The effects of various exemptions allowed under the Estate Duty Act can be easily understood from the example given below:

An individual not belonging to a joint H indu family governed by Mitakshara or al l ied ' laws, left on death an estate, valued at Rs 5,01,000

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Computation of Duty :

Ou t of the estate of Rs 5,01,000 the sum of Rs 1,000 being the maximum tax free expenses for funeral allowed under section 42 of the Act is deducted, leaving an estate of Rs 5,00,000 for the pur­pose of computation of duty.

After making deduction f o r exemptions, the net estate liable for duty stands at Rs 3,58,500 and the duty thereon works at Rs 32,443 (refer Table III). The deceased could take out a policy of at least Rs 30,000 sum assured instead of Rs 20,000 to derive ful l advantage of the concession.

I t wi l l be seen that the Estate Duty Act, 1953 has enlarged the scope of life insurance and the insurance companies should now actively ex­plore the strata of society which hitherto has been indifferent to life insurance. It may be recalled that even under the British Act where no concession is allowed, the in ­surance policies taken out for pay­ment of death duties assuring a sum of £34,000,000 met about one-th i rd of the total of death duties paid in 1951 in England.