Inheriting property is not so complex if you are a resident Indian but on the other hand, if you are an NRI, inheriting property in India is a tangled process that requires professional help as the inheritance law for NRIs is quite different and complicated from the inheritance law governing the resident Indians.
Any Non-Resident Indian (NRI), Person of Indian origin (PIO), or even a foreign national can inherit any residential and commercial properties from Relatives or non-relatives in India. NRI’s are not allowed to purchase agricultural or farmhouses in India but they are free to purchase any residential or commercial properties in India. Though NRIs cannot acquire agricultural land or Farm House by way of purchase, they can acquire them through inheritance or gift. An NRI can inherit any number of properties including agricultural land and farm house in India from a resident or non-resident Indian provided that the person from whom the NRI inherits the property, should have acquired the property in accordance with the foreign exchange law in force or FEMA regulations, applicable at the time of acquisition of the property. Under the Foreign Exchange Management Act (FEMA) Act, RBI regulates all foreign exchange transactions like investments, remittances, and payments in India. In case of any question relating to the acquiring of the property without RBI’s permission then NRI cannot inherit such property without specific permission of the RBI.
An Indian resident can transfer property to NRI or a PIO through a will or Gift. It is significant to draft and register a clear will to facilitate the smooth transfer of assets. It is mandatory to get RBI’s permission during the execution of a will while transferring property to NRI through inheritance. Inheritance takes place when the property owner dies and there is no inheritance tax in India. If the property owner dies without a will i.e., intestate, then the NRI successor has to obtain a succession certificate from the court which is a laborious process.
The property owner can also transfer the property even when he is alive through a gift deed. NRI or PIO can also acquire property through a gift from an Indian Relative or non-relative. Gifts from relatives are completely exempt, on the other hand, gifts from non-relatives will be taxed if the aggregate value of the gifts exceeds Rs.50,000
Taxation on Rental income:
Though the property received from inheritance is not subject to inheritance tax in India, the rental income from the property is considered as income from house property and is taxed at the slab rate. TDS is applicable on rental income received by NRI if it exceeds Rs. 1.8 lacs in a Financial year. The tenant is required to deduct 30% as TDS while making the payment and should be deposited with the government within the 7th of the subsequent month of tax deduction.
In case the House property is vacant then it is not taxable provided that the NRI is holding only one property in India. If an NRI is holding more than one property then one of the houses is declared as self-occupied and the other one is deemed to be let out property even if it is vacant and the NRI needs to pay taxes on deemed to be let out property based on the notional rental income.
Taxation on sale of inheritance property:
NRI is free to sell the acquired inheritance property (Residential & commercial properties) to any Indian resident or another NRI, In the case of Agricultural or Farmland he can sell it only to an Indian Resident. If an NRI sells the inherited property after 2 years from the date of purchase, then it is considered as long-term capital gains and is taxed at 20% after indexation or 10% without indexation whichever is lowest.
If an NRI Sells the inherited property within 2 years from the date of purchase, then it is considered short-term capital gains and is taxed at slab rates. The date of purchase and price paid by the previous owner from whom NRI acquired the property is considered for calculating the gains.
TDS Deduction on sale proceeds:
At the time of purchasing a property from NRI, the buyer of the property has to deduct 20% TDS and deposit it to the government if the property is sold after 2 years from the date of purchase. If the property is sold before 2 years then 30% TDS is to be withheld by the buyer. TDS will be adjusted against the tax liability of NRI. NRI can claim tax refunds by filing income tax returns if there is no tax liability.
Reinvestment of sale proceeds to claim tax exemptions:
The NRI can claim exemption U/S 54 for the long-term capital gains from the sale of residential houses by utilizing it for the purchase of new residential property within 1 year before the sale date or 2 years after the sale date. He can also invest in the construction of property provided that the construction should be completed within 3 years from the sale date.
U/s 54 EC NRI can also invest in 5-year NHAI or REC bonds within 6 months from the date of sale. The maximum amount of investment is 50 lacs in a Financial Year.
If an NRI is unable to invest the capital gains before the tax filing date of the financial year in which the transaction took place, he can deposit the gains in the Capital Gains savings account. He can also avail the exemption u/s 54F for the long-term capital gains on the sale of non-residential properties.
Repatriation of Sale proceeds from the inheritance property
An NRI can repatriate the sale proceeds of up to $1 million dollars every Financial year, without RBI approval, provided that the taxes have been paid for the sale of such property in India. If the amount to be remitted exceeds one million Special RBI approval is required for repatriation of funds.
In case the sale consideration exceeds $ 1 million dollars, the balance can also be deposited in the NRO account for any period of time. An individual cannot repatriate the sale proceeds of residential property more than twice in his lifetime.
This article should not be construed as investment advice, please consult your Investment Adviser before making any sound investment decision.
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