Tax Implications on Receiving Inheritances in India for NRIs/OCIs

Inheriting assets for the Non-Resident Indians (NRIs) in India has its own tax complications, whether it is about the ancestral homes in India or making investments abroad. The Tax implications can be different for each scenario. It depends on whether the assets are inherited from friends or relatives who live in India or abroad. 

In this blog, we have talked about all the tax implications that an NRI/OCI has to face while inheriting an asset from a resident Indian. We have also mentioned the taxability applicable to the income arising from such assets. You can learn about the legal hurdles you might face and then proceed with a smooth process. 

Understanding Inheritances

The assets under inheritance are regulated by the Foreign Exchange Management Act, 1999 (FEMA), and the Income Tax Act, 1961. According to the IT Act, if you receive any asset through will or inheritance, or in contemplation of the payer's death is known as 'inheritance'. 

The inherited assets can be in the form of cash, movable, or immovable property. As a Person of Indian Origin (PIO)/ OCI/NRI, you are allowed under FEMA to inherit any kind of immovable property, including plantation property, agricultural land, or farmhouse in India from a resident. You can also inherit it from a person who acquired it at that time under the laws in force. You are also allowed to inherit any type of movable property, such as a car, jewellery, paintings, shares, artefacts, etc. 

Tax Implications on Inheritances in India for NRIs/OCIs

Generally, there is no tax treatment on inheritances in India for NRIs/OCIs. They can easily acquire the assets without any tax implications. However, the income arising in India from such inherited assets is taxable in India as per the Income Tax Act, 1961. 

Income from Inherited Assets

Here are the tax implications of the income from the inherited assets: 

Immovable Property

• There is no tax implication for heirs on the self-occupied properties. In a financial year, you can claim up to two properties as self-occupied properties. 
• If you have any rental property, then you have to pay taxes on the rental income after considering the standard deduction and municipal taxes. 

Assets other than Immovable Property

• If you receive dividends from the inherited mutual funds or shares, this income is taxable in India under the income from other sources. 
• Also, if you have any interest income from the inherited bonds, fixed deposits, or debentures, then you have to pay taxes on it as income from other sources. 
• The income that are subjexct to taxation is taxed at the applicable rate as per the income slab of the taxpayer. It is usually determined by the total income of the taxpayer in a financial year and the tax regime he/she has opted for. 

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Sale of Inherited Assets

Here are the tax implications of the sale of Inherited assets:

Immovable Property

If a property is owned by an individual for more than 24 months, then it will be considered a long-term asset.

• If you inherit a property from someone, then the holding period of the previous owners is also considered. Hence, in such cases, the sale of these properties results in long-term capital gain.
• According to Section 49 (1) of the IT Act. 1961, while you calculate the capital gains for these cases, the costs incurred by all the previous owners should be considered. If the specific property was acquired before April 1, 2001, its cost should be based on its value at the date of acquisition or the fair market value on April 1, 2001. 

Listed Shares and Securities

• There are no tax implications on the date of inheritance for the shares and securities you have received from a relative. If you receive them from a non-relative, then the deemed tax liability will be calculated by using the Fair Market Value (FMV) of such shares. 
• If you sell any shares after holding them for more than 12 months, then the profit will be considered a long-term capital gain.
• If the specific asset was acquired before April 1, 2001, then its cost must depend on its valuation on its date of acquisition or April 1, 2001. 
• According to Section 112A of the IT Act, 1961, if any gain is more than Rs 1 lakh in any of the above-mentioned categories, then it will be subject to tax.

Any other asset (such as movable property, including unlisted shares)

When an asset is owned for 36 months or more, it will be considered a long-term asset.

• While inheriting an asset, the holding period of the previous owners is also considered. The sale of these types of assets results in long-term capital gains.
• For calculating the capital gains for these cases, the cost of previous owners is also considered as per Section 49 (1) of the IT Act. For the assets acquired before April 1, 2001, the cost of the asset should be as per its valuation on the date of acquisition or on April 1, 2001. 

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Legal Difficulties for NRIs/OCIs in Inheriting Property

The OCIs/NRIs are allowed to inherit property in India as per the laws. There are some challenges in this process, some of which are given below:

• Inherit specific properties: Certain types of properties can be inherited by the OCIs/NRIs in India. Only the residential and commercial properties are allowed for inheritance. The farmhouses, agricultural land, and plantation properties are still off-limits, and there are some complications involved. 
• Legal Documentation: To claim inheritance, the OCIs have to submit a valid proof of inheritance, such as a succession certificate or will. The process can be very complex without a will, as it can involve court proceedings and potential disputes between the heirs.
• Dealing with the local authorities: You need to deal with the property transfer documentation and navigate the local land laws while registering the inherited property in the name of an NRI/OCI. In such procedures, you may have to hire a legal representative in India, which can cost you both time and money. 

Repatriation of Funds from Property Sale

The Overseas Citizen of India (OCI) has to face the additional difficulties in repatriating funds if they want ot sell the inherited property. They have to follow the guidelines of the Reserve Bank of India (RBI). The OCIs can only repatriate the funds that came from the sale proceeds of inherited property up to a certain limit if the property was acquired through the legal procedures.

They have to obtain permissions and necessary certificates from the RBI to proceed with repatriation. They also make sure to maintain compliance with the Foreign Exchange Management Act (FEMA) regulations, as it governs the cross-border transactions. You may also need legal assistance to proceed with this intricate process. 

There are many legal hurdles and tax obligations for OCIs in property inheritance cases in India. You should have a proper understanding of tax implications, property laws, and legal procedures to navigate the inheritance. To ensure a smooth process, you should seek legal and financial advice from the experts.

How Can Visament Help? 

According to the rules of FEMA and the IT Act, the NRIs/OCIs are allowed to inherit the assets in India. Inheriting these assets brings no taxability in India, but if there is any income arises from such assets, then it is subject to taxation. There are many tax implications applied to individuals as per their inheritance. You should consult a legal expert to understand them properly.

Visament has a team of skilled professionals with many years of experience. They can help you with the tax implications of the income arising from the inherited assets. They are available 24/7 on the platform and can guide you thoroughly about the procedures.