NRI expats: How are inherited funds or properties taxed in India?
There is no inheritance tax in India, but there are other rules to factor in
Dubai: While it’s common to have property and other financial assets passed on from ancestors, parents, or grandparents to their rightful legal heirs like children or grandchildren, what is uncommon is knowing whether you will be taxed for such inheritances.
In most countries worldwide, there is a tax imposed when you inherit or handed down funds, properties, or other investments. But who must pay such taxes and how they are calculated? Also, how does it affect you as a Non-Resident Indian (NRI) residing away from home?
“We are lucky that Indian government recognised the value of inheritance and emotions attached to that hence making it exempted from any taxes in India,” said Dixit Jain, managing director at The Tax Experts DMCC, a Dubai-based tax advisory.
“Unlike other countries where people pay heavy taxes on inheritances, any amount inheritance received in India would be tax free. But only capital received as inheritance will be tax free, once you receive and invest it, any further income gained on such income may be taxed in India.”
We are lucky that Indian government recognised the value of inheritance and emotions attached to that hence making it exempted from any taxes in India
What tax is incurred on inheritances?
India-based banking and tax researcher Brijesh Meti too agreed that under India’s Foreign Exchange Management Act (FEMA) regulations, an NRI can inherit immovable property situated in India from an Indian resident without the permission of the Reserve Bank of India.
“‘Estate Tax’, popularly known as ‘Inheritance Tax’, is a type of tax that is levied when you inherit a financial asset such as a property. But the inheritance of such property is not subject to any income tax in India irrespective of the cost of the property you inherit.”
As there is no inheritance tax in India, if you inherit property or assets, you’re not required to pay any taxes on it, but like Jain, Meti also noted that if you choose to sell the asset or gain any income or profit from the inherited property, you must start declaring the inheritance on your tax returns.
“When you inherit ancestral properties, you have multiple options. You can keep it as your retirement plan, rent it out, gift it to your relatives or sell it for good if you want to stay abroad after retirement. However, when it comes to tax-related charges, there are just as many options.”
“It’s key to estimate what will be the cost of the property as it was not purchased by the current seller, and it was purchased a long while back. Any long-term capital gains made on selling house property are taxed at a fixed rate of 20 per cent.”
What to know when selling inherited realty?
Whether you are an NRI or an Indian resident, the tax provisions for sale of inherited property are the same. Since the property would have most likely been bought several years earlier, any profit made on sale of it will be taxed as ‘long-term capital gains'.
This is because any capital asset held by the taxpayer for a period of more than 36 months immediately preceding the date of its transfer will be treated as long-term capital asset. But what if the asset, which in this case is the property, was in possession and the transfer dated too far back?
For computing capital gains, you will have to take the fair market value (FMV) of the property as on April 1, 2001 as your cost. Let’s further understand why this date is important and how inflation plays a highly important role when deciding on the sale price for an ancestral property.
“One thing which should be kept in mind is that inheritance can be legally challenged at times, so ensure proper documentation like ‘Probated Will’ or any other relevant or pre-required documents are kept handy if such situations arise,” added Jain.
(Probate is the process completed when a decedent leaves assets to distribute, such as bank accounts, real estate, and financial investments. Probate is the general administration of a deceased person's will or the estate of a deceased person without a will.)
Among other documents required for selling inherited property in India, a legal deed that either documents the sale, proves the inheritance is a gift, or being abandoned or surrendered, will be required – depending on the nature of the transfer.
Move inheritances to non-resident accounts?
Interest received on non-resident external account (NRE) account is exempt from tax, whereas, interest received on non-resident ordinary account (NRO) is chargeable to tax. Under the FEMA regulations, credit of such inheritance amount is permissible in both NRE and NRO account.
However, Meti advises that considering there is tax exemption on the interest on NRE account and as the NRE balance can be sent to a foreign account in your current country of residence or to any other country (repatriate), it’s advisable to deposit the inheritance in NRE deposit.
“To be on the safer side, you should also seek an expert’s advice on the FEMA regulations before depositing the inheritance amount in the NRE account, to ensure compliance with the foreign exchange regulations,” he added.
“With an NRO Account, you are free to repatriate or transfer the interest you earn on the amount deposited. You can also transfer the amount within specified limits. As per rules, you can transfer up to $1 million (Dh3.67 million) in one financial year post payment of taxes, if any.”
Save on tax when selling ancestral property?
While the process of evaluating the value of an inherited ancestral property helps reduce capital gains and related tax burden, if you wish the buyer not to deduct tax (TDS), experts suggesting also approaching the jurisdictional income tax officer to issue you a certificate for non-deduction of TDS.
“The major tax benefit on inherited property is one can claim tax exemption on the gains that are made from the sale of the same property. It can be done by reinvesting the gains in another property,” added Meti.
“This can be claimed when the long-term capital gains are less than Rs20 million (Dh900,307) and the reinvestment is done only in a maximum of two residential properties located in India. If gains are more than Rs20 million the inheritor can reinvest in one property to claim the exemption of tax.
“You can either use the gains to construct a house within three years from the sale of the ancestral property, or you can invest the profits in capital gains bonds within six months from sale of the property, with the total investment limit in bonds restricted to Rs5 million (Dh225,076) annually.”
Bottom line?
There is no inheritance tax in India, so if you inherit property or assets, you will not be required to pay any taxes on it. However, if you choose to sell the asset or gain any income or profit from the inherited property, you must start declaring the inheritance on your tax returns.
If gains are more than Rs20 million (Dh880,000), you can reinvest in one property to claim the exemption of tax. But such investments are to be made within the specified time limits, i.e. one year prior to the sale or two years from the sale, or within three years for an under-construction realty.