Introduction:
Non-resident or resident, an individual can transfer his assets to his heirs (legal) or any person through a Will. When the individual dies, his assets are transferred to the above-mentioned parties or if the individual has created his Will. This concept is called the devolution of an asset. A person inheriting the assets is called inheritor and this process of inheriting the assets is called inheritance.
The transferring of titles, property, debts, obligations, and rights by a person to another person after the former’s death is inheritance. Under the Indian laws regarding inheritance or succession, the property can be inherited by a person in 2 ways. First is through will and second is through the laws of succession if the person died without making any will i.e., intestate.
Who is an NRI?
NRI stands for Non-Resident Indians. A person can be described as NRI under four conditions. Firstly, if a person is an Indian citizen who is not residing in India for a minimum of 182 days during the period of the previous financial year. Secondly, if a person resides outside the country or has moved out of the country for the purpose of employment. Thirdly, if the person is residing outside India or moved out of the country for carrying out the business outside the country. Fourthly, if the person is residing outside India or moved out of the country with the purpose that suggests that his intention is to reside outside the country for a period of time that is not specified.
Indian Laws Related to Inheritance of Property for Non-Resident Indian
In India, laws regarding the transfer of property works simultaneously with the Income Tax Act, 1961 and Foreign Exchange Management Act, 1999. Both the laws are applicable in the case of inheriting the property and continuing the ownership of the property by NRI.
Types of Properties that an NRI can Inherit in India
Properties in India can be inherited in India by an NRI same as any other citizen of India. Property can be residential or commercial. Even inheriting the farmhouses and agricultural lands is the legal right of an NRI whose purchasing in India by the transfer of property laws is otherwise prohibited by an NRI.
Properties in India by family or relative can be inherited by an NRI and they can also inherit another NRI’s properties but this inheritance is subject to few regulations. For instance, the approval from the Reserve Bank of India is mandatory when the inheritance is in the favor of NRI being a foreign citizen.
The person from whom the NRI is inheriting the property needs to inherit the property which is bequeathed which is in accordance with the prevalent laws regarding the foreign exchange.
Tax Burden for an NRI during Inheritance of The Property and Taxation Burden Continuing of Ownership
During inheritance, there is no burden of tax ever since “estate duty” was abolished in India. Therefore neither deceased person’s representative or inheritor has to pay any tax or duty at the time of commencement of inheritance. But if the property whose value exceeds Rs. 50, 000 is being transferred as a way of gift during the lifetime of the owner, then the receiver needs to add the property’s market value in his total income. There is an exception of the specified relatives of the transferor who is gifting the property.
NRI has the right or retain or sell the ownership of property. If the NRI decides to sell off his property then he has to pay the specific tax for the time during which he is retaining the ownership of the property. But the NRI does not have to pay the wealth tax as an owner of the property as it was scrapped in India. According to the law, NRI has to furnish the amount which he earned from the property he inherited in India if he is a non-resident because of the income tax laws. But if the property is unoccupied and he has kept the property for staying there during his visit to India, then the above-mentioned rule is not applicable.
If more than one property is owned by an NRI including the inherited property, then the NRI has to keep one property for self-occupying and then furnish the rental incomes regarding the unoccupied properties which are on the basis of the rent amount which that property can collect if put in the market. When the NRI returns to India, he has to file his income tax if his total income (including rental and estimated rental income) from all the sources is more than the exemption limit which is stipulated by the department of income tax.
Taxation Burden During the Sale or Gifting of the Property
An NRI can sell the inherited property or gift it away. He can receive the money obtained outside India but when there is the gifting of a property, there are certain limitations attached to it by an NRI.
The inherited property can only be gifted by the NRI to an NRI or citizen of India or OCI (Overseas Citizen of India). If the property is gifted to a person who is not a relative of the NRI, then the receiver is bound to pay the tax which is based on the property’s market value.
If the NRI is selling the property to another NRI, then he needs to acquire permission from RBI. And NRI can only sell the property to an Indian resident/citizen if the property is inherited farmhouse, agricultural or plantation land. But if the property was owned or inherited by the NRI when he was a resident of India, he can transfer, gift, sale or rent the property is any way he desires.
Non-Indian origin foreign nationals, who do not reside in India, cannot obtain any Indian immovable property except inheriting it from someone who was a resident of India. They also do not have the right to sell or transfer the inherited the property without the approval from RBI.
Capital Gains on Inherited Property (By an NRI)
Section 195 of Income Tax Act, 1961 states that the person has to deduct the income tax on the “taxable amount of the capital gains” at the rates that are applicable under the law if the person is buying the property from a Non-Resident Indian.
If the integrated holding period of the deceased person and the inheriting of the property by the inheritor has crossed a total of 24 months, then the profits that are earned by the sale certifies as a “long-term” capital gains. It is an option available to an NRI to pay the tax at 20% on long term capital gains or utilize the available tax benefits in Sections 54 and 54F of the Act by the way of investing in a new property (residential house). NRI also has the option of investing a maximum of 50 lakh rupees a year in the bonds of capital gains in certain institutions such as Power Finance Corporation and Railway Finance Corporation, Rural Electrification Corporation, or National Highways Authority of India, etc but in the specified period.
Repatriation of the Sale Proceeds (Inherited Property)
The sale proceeds of a maximum of 1 million dollars a year can be repatriated by an NRI without prior permission from Reserve Bank of India but on the condition of paying the tax in India for the sale of the property. If the amount exceeds the abovementioned amount, then special permission of RBI is required.
There are a few conditions attached to it. The property which is being sold needs to be obtained according to the regulations under foreign exchange within a significant period. The amount that is being repatriated should not exceed the sale proceeds cost obtained from the transaction. The repatriation of sale proceeds by an NRI can only be done of a maximum of 2 properties being residential. The funds obtained can only be repatriated after the relevant taxes and any other additional charge have been rectified.
Conclusion
The inheritance of immovable property by an NRI is not that complicated. It can easily be inherited by them if the certain conditions that are attached to it are fulfilled. There are also certain exceptions attached to this. In India, there are no specific laws that govern the whole transfer, sell, gifting, renting, and inheriting if the property by an NRI that makes it a little difficult for people to understand it.
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