Laws governing inheritance of immovable property in India by NRIs

[ecis2016.org] Provisions under the Foreign Exchange Management Act (FEMA), as well as the Income Tax Act, are applicable to the inheritance of immovable property and its continued ownership by NRIs or PIOs. We examine these laws

Laws governing property ownership by non-residents in India are not only different from the laws governing residents, they are also quite complicated. Even though there is a wide range of assets that NRIs can own in the country of their birth, the same cannot be said about the inheritance laws that apply in case of such properties. They are complex in nature and the asset holder must be acutely conscious of the legal provisions in this matter.

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Types of properties that can be inherited in India, by NRIs

A non-resident Indian (NRI) or person of Indian origin (PIO), can inherit any immovable property in India, whether it is residential or commercial. They can even inherit agricultural land or a farmhouse, which they are otherwise not entitled to acquire by way of purchase.

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An NRI can inherit the property from anyone including his relatives. The NRI or PIO can inherit property in India even from another NRI or PIO, subject to certain conditions. The RBI’s permission is necessary, if the inheritance results in favour of a citizen of a foreign state, who is a resident outside India.

It is important to note that the person from whom the NRI inherits the property, should have acquired the property being bequeathed, in accordance with the provisions of law relating to foreign exchange, prevalent at the relevant time. So, if the property in question was acquired without obtaining permission from the Reserve Bank of India, when the permission was required to be obtained, such property cannot be inherited by the NRI or PIO, without specific permission of the RBI.

Tax incidence at the time of inheritance of the property

As Estate Duty was abolished long back, there is no tax incidence at the time of inheritance. So, neither the representative of the deceased, nor the inheritor, have to pay any tax at the incidence of inheritance. In case the same property is transferred by the person during his lifetime by way of a gift and the value of the property exceeds Rs 50,000, the recipient has to include the market value of the property received as gift in his total income, unless he is among the specified relatives of the donor.

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Taxation on continued ownership of inherited property

The NRI or PIO can continue to retain the ownership of the property, or dispose it. Even if the NRI decides to dispose of the property, there are certain tax implications for the period during which he retains the ownership of the property. As wealth tax has been abolished in India, the NRI does not have any wealth tax implications, for being the owner of the immovable property.

If the NRI is a non-resident for the purpose of income tax laws, based on his stay in India, he will have to offer the income earned from the inherited property in India. In case the NRI decides to keep the inherited house property vacant, for the purpose of residing in it during his visit to India, he does not have to offer any income for taxation on such property. However, in case he owns more than one house property, including the inherited property and keeps them vacant, he has to choose one property as self-occupied and offer notional rental income, with respect to the other properties, based on the amount of rent which the property would fetch in the market. The NRI will have to file his income tax return in India, if his total income from all the sources including the rental and/or notional rental income exceeds the basic exemption limit.

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Taxation incidence at the time of sale or gift of the property

An NRI can either gift away the inherited property or sell the same and remit the money outside India. There are certain restrictions on gifting of the property by an NRI. The NRI can gift the inherited property, only to a person who is resident in India or an NRI or PIO. He cannot gift the property to a person who is neither of these. In case of gift to a non-relative, the recipient will have to pay tax on the market value of the property that is received as a gift.

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If an NRI/PIO wants to sell his property to another NRI / PIO, he has to first obtain prior permission from the RBI. Likewise, if the NRI wants to sell an inherited agricultural land, plantation land or a farmhouse, the same can be sold to a resident and citizen of India. However, if the NRI owned or inherited the property, while he was a resident of India, he can deal with the property the way he wants, by means of sale, rent, transfer or gift.

Foreign nationals of non-Indian origin, resident outside India, are not permitted to acquire any immovable property in India, unless such property is acquired by way of inheritance from a person who was resident in India. Foreign nationals of non-Indian origin, who have acquired immovable property in India by way of inheritance, with the specific approval of the RBI, cannot sell or transfer such property, without prior permission of the RBI.

Capital gains on property inherited by an NRI

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In case the property is sold by the NRI, the person who buys the property will have to deduct income tax under Section 195 of the Income Tax Act, on the taxable amount of capital gains at the rates applicable.

If the combined holding period of the inheritor and the deceased exceeded 24 months, the profits made on such sale shall qualify as long-term capital gains. For the purpose of computation of capital gains, the cost for which the property was purchased by any of the previous holders, shall be taken as the cost of acquisition if the property was acquired after April 1, 2001. In case the property was acquired before April 1, 2001, the seller has the option to take the market value of the property as on April 1, 2001, as the cost and apply the indexation on this, for computing the capital gains.

The NRI has the options to either pay the tax on such long-term capital gains at 20 per cent, or avail of the tax benefits under Section 54 and 54F, by investing in a new residential house. Alternatively, the NRI has an additional option to invest upto Rs 50 lakhs in a year, in capital gains bonds of specified institutions like Rural Electrification Corporation or National Highways Authority of India or Power Finance Corporation and Railway Finance Corporation, within specified time limits.

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Repatriation of the sale proceeds of the inherited property

An NRI can repatriate the sale proceeds up to one million dollars every year, without any approval from the RBI, provided taxes in India have been paid for the sale of such property. However, special RBI approval will be needed, if the amount to be remitted exceeds one million.

(The author is a tax and investment expert, with 35 years’ experience)

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