Non-resident Indians (NRIs) have the privilege of inheriting immovable property in India, including agricultural or farmland. While NRIs are not allowed to purchase such properties directly, they can inherit them from relatives, even if those relatives are residing outside India. In this comprehensive guide, we explore the eligibility, conditions, and tax implications associated with inheriting and dealing with inherited properties for NRIs.
Eligibility and Conditions for Inheriting Property
NRIs can inherit immovable property in India, subject to the condition that the property was purchased following the guidelines of the Foreign Exchange Management Act (FEMA) at the time of acquisition. This inheritance extends to foreign nationals as well, provided the property was inherited from a person who was, or still is, a resident of India.
Tax Implications at the Time of Inheritance
With the abolishment of Estate Duty, there are no tax implications at the time of inheritance. Neither the representative of the deceased nor the NRI inheriting the property is required to pay any tax during this phase. However, if the property is gifted, and its value exceeds Rs. 50,000/-, the recipient must add the market value to their total income unless they are among the specified relatives of the deceased.
Tax Implications at the Time of Sale or Gift
NRIs can sell or gift an inherited property, with the ability to remit the proceeds outside India. However, gifting is limited to Indian residents or other NRIs/Persons of Indian Origin (PIO), excluding agricultural land. If the property is gifted to a non-relative, the recipient is liable to pay tax on the market value of the gifted property.
Regulations for Sale to Another NRI/PIO
Before selling a property to another NRI/PIO, an NRI must obtain prior approval from the Reserve Bank of India (RBI). Foreign nationals cannot sell or transfer an inherited property without the RBI’s permission.
Capital Gains on Sale
When an NRI sells an inherited property, the buyer must deduct income tax under Section 195 of the Income Tax Act on the taxable amount of capital gains. If the total holding period exceeds 24 months, the profits are considered long-term capital gains. The NRI can choose to pay tax at 20% or avail tax benefits under Section 54 and Section 54F of the Act. Short-term capital gains are taxed at a progressive slab rate.
Repatriation of Sale Proceeds
An NRI can repatriate the sale proceeds of an inherited property up to USD one million per year without RBI approval, provided taxes have been paid on the sale. Exceeding this limit requires prior permission from the RBI.
Inheriting property in India as an NRI involves navigating legal nuances and understanding tax implications. Staying informed and seeking professional advice ensures a smooth and legally sound process for NRIs involved in property inheritance.