Inheriting assets as a Non-Resident Indian (NRI), whether it’s an ancestral home in India or investments abroad, often comes with its share of legal and tax-related nuances. The tax treatment of these inheritances varies depending on whether the assets were received from relatives or friends residing in India or abroad. This blog explores the key aspects of inheriting and managing assets as an NRI, shedding light on the relevant laws and processes.
The inheritance of assets is governed by the Foreign Exchange Management Act, 1999 (FEMA), and the Income Tax Act, 1961 (IT Act).
- According to the IT Act, any asset received through a Will, inheritance, or in contemplation of the payer’s death is classified as “inheritance.”
- As an NRI, Person of Indian Origin (PIO), or Overseas Citizen of India (OCI), you are allowed under FEMA to inherit immovable properties in India, such as agricultural land, plantation properties, or a farmhouse, from a resident or anyone who lawfully acquired such property. You can also inherit movable assets like cars, jewellery, shares, or other valuables.
Tax Implications of Inherited Assets in India
In terms of tax on inheritance in India, the good news is that there is generally no tax applied at the time of receiving the assets. However, any income generated from the inherited assets will be subject to tax under the IT Act, 1961.
For instance, if you inherit immovable property, there are different tax implications depending on its use.
- A self-occupied property will have no tax implications, but only up to two properties can be claimed as self-occupied in a financial year.
- If the inherited property is rented, you will be liable to pay tax on the rental income, after considering municipal taxes and standard deductions.
If you inherit assets other than immovable property, such as shares or mutual funds, any dividend income from those assets will be taxed as income from other sources. Similarly, any interest income from inherited fixed deposits, bonds, or debentures will also be taxable under the same category. The tax rate will depend on your total income for the financial year and the tax regime you choose.
Tax Implications on Sale of Inherited Assets
When it comes to the sale of inherited assets, there are specific tax rules based on how long you’ve held the asset.
- Immovable Property:
If it has been owned for more than 24 months, it is considered a long-term asset. If you sell the property, the holding period of the previous owners is also taken into account, meaning the property may qualify as a long-term capital asset.
In such cases, while calculating the capital gain, the cost of the property as incurred by the previous owners is used. If the property was acquired before April 1, 2001, the cost is calculated based on either its acquisition value or fair market value as of April 1, 2001.
- Listed Shares and Securities:
If you receive them from a relative, there are no immediate tax implications. However, if the shares are inherited from a non-relative, their fair market value (FMV) will be used to calculate any deemed tax liability.
If you later sell the shares after holding them for more than 12 months, the profit will be classified as a long-term capital gain. The same applies to other movable assets like unlisted shares, where the holding period of more than 36 months classifies the asset as long-term.
The cost of acquisition must consider the previous owner’s holding period. If these assets were acquired before April 1, 2001, the FMV on that date is used for calculating the capital gains.
Repatriation of Sale Proceeds from Inherited Assets
When it comes to repatriation (sending the money back to your home country), if you sell an inherited asset, the proceeds must be deposited into your Non-Resident Ordinary (NRO) account. You can repatriate up to USD 1 million per financial year (April-March) from the sale proceeds. However, sale proceeds from agricultural land, plantation property, or a farmhouse cannot be repatriated outside India.
Conclusion
Creating a Will as an NRI is essential to ensure your assets are distributed according to your wishes. It reduces the risk of legal complications, disputes, and unnecessary tax liabilities for your loved ones.
At Mitt Arv, we believe in empowering you to secure your legacy with confidence. Our comprehensive Asset Vault simplifies estate planning, ensuring all your assets are meticulously organized and your wishes honored. With Mitt Arv by your side, you can create a seamless and stress-free transition for your loved ones, safeguarding their future while preserving your peace of mind. Start your legacy planning today with Mitt Arv!
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FAQs
1. Can NRIs inherit both immovable and movable assets in India?
Yes, NRIs, Persons of Indian Origin (PIOs), and Overseas Citizens of India (OCIs) can inherit both immovable assets, such as agricultural land, plantation properties, and farmhouses, as well as movable assets, like jewellery, shares, and cars, under the provisions of the Foreign Exchange Management Act, 1999 (FEMA).
2. Are there any taxes on inherited assets in India?
No, there is no tax on receiving inherited assets in India. However, any income generated from these assets, such as rental income or interest, is taxable under the Income Tax Act, 1961.
3. How are capital gains calculated on the sale of inherited assets?
Capital gains on the sale of inherited assets are calculated based on the holding period of the asset. The holding period of the previous owner is also considered. For assets acquired before April 1, 2001, the fair market value as of that date is used to determine the cost of acquisition for capital gains purposes.
4. Can the sale proceeds of inherited assets be repatriated?
Yes, sale proceeds from inherited assets can be repatriated to your home country, but only up to USD 1 million per financial year. These proceeds must be deposited into a Non-Resident Ordinary (NRO) account. However, sale proceeds from agricultural land, plantation property, or a farmhouse cannot be repatriated.
5. Why is it important for NRIs to create a Will?
Creating a Will ensures that your assets are distributed according to your wishes and reduces the risk of legal disputes or complications. A Will also helps your beneficiaries avoid unnecessary tax liabilities and simplifies the inheritance process under Indian law.