For Indians settled abroad, the transfer of ownership can be a slightly complicated process compared to what it would be if one is an ordinary Indian citizen.
To begin with, transfer of ownership of the inherited property to non-resident Indians (NRIs) and persons of Indian origin (PIOs) is required to comply with the Foreign Exchange Management Act (FEMA). The person who is transferring the property also must acquire it in compliance with FEMA regulations or any other foreign exchange law in place at that time. One needs to take permission from the RBI to transfer the inheritance to favour a foreign national.
Property in India can be transferred through a Will, but one must take permission from the RBI if the beneficiary is a PIO or an NRI.
An Indian resident can also transfer property to an NRI as a gift. As per rules, only commercial or residential estate can be bought by an NRI or a PIO, but not a farmhouse or agricultural land. This kind of inheritance can come from a non-relative too.
While inheritance comes after the owner dies, a gift can be given while the owner is still alive. Although there is no tax inheritance in India, gifts given to people not in the list of specified relatives are taxable. If the gift’s value exceeds Rs 50,000, the recipient will be taxed.
In India, people acquiring property must pay tax on rental income and capital gains from its sale. If an NRI owns just one property in India, there is no tax involved. However, if an NRI owns more than one property in India, one house can be declared self-occupied. On the other hand, the rent from other properties will need to be declared in the tax return. The NRI will have to pay taxes on notional rental income at the market rates irrespective of whether the properties are vacant or occupied.
An NRI who wishes to sell an inherited property acquired more than two years ago will be taxed 20% on long-term gains after indexation. On the other hand, if they acquired a property less than two years ago, the gain will be added to their income and taxed at normal rates. The gains will be calculated based on the date of purchase and the price that the original owner had paid.
A person buying property sold by an NRI will have to deduct TDS and deposit the amount with the government on the seller’s behalf. If the property is sold two years after it is purchased, it will be 20%. TDS will be 30% if the property is sold within two years. One can claim the TDS as a refund by filing an income tax return if no tax is payable.
NRIs, under section 54, can use long-term capital gain amounts to buy a new property to escape tax — two years after the sale of the property or one year before.
An NRI who cannot invest the capital gains until the date of filing of return of the financial year in which the transaction was made may deposit the gains in the Capital Gains Account Scheme of a PSU bank.
The exemption is available under section 54F for a non-residential property as well, in which case one must invest the entire sale proceeds to buy a house. One can also invest the long-term capital gains in 5-year NHAI or REC bonds.
NRIs get as many as six months to invest in these bonds. They can invest a maximum of Rs 50 lakh in a financial year.
Repatriation of sales proceeds from India is not a very simple process. Property sales proceed up to $1 million (Rs 7.4 crore) can be repatriated in a financial year after the RBI permits.
The amount cannot exceed:
- The amount that one pays for acquiring the property in foreign exchange received out of funds held in a Non-Resident External account for the property’s acquisition or through normal banking channels.
- The foreign currency is equivalent to the date of payment of the amount paid where one made such payment from the funds held in a Non-Resident External account for the property’s acquisition.
An individual cannot do such repatriation from the sale of residential properties more than twice.