What is Inheritance Tax?
Unlike many countries, India's tax structure does not include a specific levy on inherited assets. Inheritance tax, distinct from income or capital gains tax, directly targets the value received through inheritance. While other taxes may apply to income generated from inherited assets or potential capital gains upon their sale, the act of inheriting itself does not trigger any tax burden in India.
This absence of inheritance tax in India presents a notable advantage for NRIs inheriting property or assets within the country. They can receive their inheritance without facing any immediate tax obligations solely due to inheriting.
History of Inheritance tax
Inheritance tax or tax/estate duty laws in India applies when there is transfer of assets to the inherent people upon death but then the laws or taxes on it gradually abolished in 1985. As if now, there is no inheritance tax law in India. The tax is implied in these cases where,
If they generate any income like rent, interest, et through it. . The income generated by the inherited property is taxed at the income tax return filing.
If the inherited assets are sold by the heirs, and they have to pay the capital gain tax on the profit earned from the sale.
Types of property that NRIs can inherit
There are no limitation to NRIs while inheriting property. This means, NRIs can inherit (from a resident Indian or another NRI) and hold any number of immovable properties in India including commercial, residential, agricultural including farmhouses in India.
Under the Foreign Exchange Management Act (FEMA), Non-Resident Indians (NRIs) can inherit immovable property in India from Indian residents without requiring permission from the Reserve Bank of India (RBI). Notably, this inheritance is exempt from income tax in India. Additionally, India does not impose inheritance taxes, making the process even more advantageous for NRIs.
Indian inheritance laws differentiate between two primary categories of property: movable and immovable.
- Movable property: This encompasses assets like cash, jewelry, or vehicles. Inheritance of movable property generally follows the principles of succession laws applicable to the deceased's religion. For instance, the Hindu Succession Act of 1956 dictates inheritance for Hindus, Buddhists, Sikhs, and Jains.
- Immovable property: This refers to land, buildings, and other fixed assets. Inheriting immovable property by an NRI is permitted, encompassing both residential and commercial properties. Interestingly, NRIs can even inherit agricultural land or farmhouses, which they wouldn't be able to purchase directly due to regulations. However, the succession laws pertaining to the deceased and the location of the property will determine the inheritance process.
Tax liability for an inherited property as an NRI
Inheritance under FEMA:
The Foreign Exchange Management Act (FEMA) regulates various financial aspects for NRIs in India, including property ownership. Fortunately, NRIs are permitted to inherit property within the country as per FEMA guidelines. This inheritance can involve both movable and immovable assets.
No Tax on Inheritance:
It's essential to reiterate that there is tax liability for NRIs on inheritance in India. This implies that NRIs receiving assets through inheritance are not subject to any immediate tax burden solely due to inheriting.
Tax Considerations Upon Disposition:
While inheriting itself doesn't trigger taxation, NRIs should be aware of potential tax implications when deciding to sell their inherited property. Capital gains tax might apply based on the difference between the inherited property's market value at the time of inheritance and the sale price.
Income Tax on Rental Income:
If an NRI inherits property that generates income, such as rental income from a building, they become liable to pay income tax on that income in India. NRIs can avail of tax treaties between India and their country of residence to potentially reduce their tax burden.
Consulting a tax professional is vital for NRIs to determine the exact tax implications based on the specific circumstances surrounding their inherited property and their residency status. Our tax experts can guide you through the intricacies of capital gains tax calculations and any potential tax benefits or exemptions available under the current tax regime. Book Consultation Today!
Can an NRI sell an inherited property?
Yes, an NRI can sell the property to a resident Indian , an NRI or a PIO. The only exception here is that an NRI holding agricultural land, plantation land or farm house may sell these properties only to a person resident in India and who is a citizen of India.
PIO can sell property in India to a person resident in India or an NRI. In case a PIO wants to sell to another PIO, he will need to get prior approval from RBI.
Calculation of Inheritance Tax
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Assess Total Asset Value: Begin by determining the total market value of all assets owned by the deceased at the time of their death. This includes:
- Real estate properties
- Investment holdings (stocks, bonds, mutual funds, etc.)
- Bank account balances
- Vehicles
- Personal belongings (jewelry, art, collectibles)
- Calculate Net Estate Value: Subtract any allowable debts and liabilities from the total asset value to arrive at the net estate value. Liabilities may include mortgages, loans, and unpaid bills directly attributable to the deceased.
- Determine Taxable Estate: After calculating the net estate value, determine if any thresholds or exemptions apply. Some jurisdictions provide allowances that exempt a portion of the estate from taxation. These could be based on the relationship between the deceased and the beneficiary (e.g., spouse, children) or a fixed monetary allowance.
- Apply Inheritance Tax Rates: Once the taxable estate is determined, apply the prevailing inheritance tax rates. Inheritance tax rates can vary significantly depending on the jurisdiction and the value of the estate. Rates may be flat or progressive, meaning they increase as the estate value goes up.
- Consider Tax Planning Strategies: Prior to death, individuals may use legal strategies such as gifting assets or setting up trusts to minimize the inheritance tax burden on their beneficiaries. These strategies should be reviewed and factored into the calculation of the taxable estate.
- File Tax Returns: Don’t forget to file your taxes timely. The last date to file taxes for individuals is 31st July 2024. File Today.
What are the tax implications of sale of inherited property by an NRI?
While inheriting property in India itself doesn't attract tax for NRIs, it's crucial to understand potential tax liabilities that might arise in specific scenarios:
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Capital Gains Tax: As mentioned earlier, NRIs selling their inherited property are subject to capital gains tax. This tax is charged on the profit earned from the sale, calculated as the difference between the inherited property's market value at the time of inheritance and the final sale price.
- Long-Term Capital Gains (LTCG): If the property is held for more than 24 months from the date of inheritance, LTCG tax applies. Currently, this tax stands at 20.8% (including cess) with indexation benefits that help adjust for inflation.
- Short-Term Capital Gains (STCG): If the property is held for less than 24 months, STCG tax is applicable. This tax is calculated based on the individual's income tax slab and can be significantly higher than LTCG.
- Wealth Tax (Abolished): It's important to note that India abolished wealth tax in 2015. Previously, this tax applied to the net wealth of individuals, potentially impacting NRIs holding high-value inherited assets. While no longer relevant, understanding its past existence provides a more comprehensive picture of potential tax considerations.
Navigating NRI inheritance laws in India, consult with tax experts.
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