Inheritance Laws And Tax For NRIs

Non-Resident Indians (NRIs) in India should abide by succession laws when inheriting property located within Indian territory. Knowing the difference between immovable and movable assets is crucial as regulations differ depending on which they belong to.

Types of Assets

 Movable Assets: These include bank accounts, stocks, jewelry, etc.

 Immovable Assets: These refer to land, houses, and real estate.

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Succession Laws

Movable Assets: The inheritance of movable assets is governed by Indian succession laws, which depend on the religion of the deceased. These laws may include:

•  The Hindu Succession Act
•  The Indian Succession Act
•  Muslim personal laws

Immovable Property: The regulations for inheriting immovable property depend on whether the property is self-acquired or ancestral.

Self-Acquired Property: This can be bequeathed through a will.

Ancestral Property: This follows succession rules influenced by religious beliefs and regional customs.

Tax Implications

India does not impose an inheritance tax; therefore, inheriting is untaxed itself. However, taxes may apply on any income generated from inherited assets. For instance:

Rental Income: If the inherited property is rented out, the rental income is subject to tax.

Capital Gains Tax: If the inherited property is sold, capital gains tax may apply on the profit from the sale.

Who is an NRI?

An NRI (Non-Resident Indian) is defined based on two main Acts: the Income Tax Act, 1961, and the Foreign Exchange Management Act (FEMA), 1999. According to these definitions, an NRI is:

An Indian citizen who has not resided in India for more than 182 days during the previous financial year.

Someone who has left India to take up employment or business abroad.

Someone who stays abroad with the intention of an uncertain period of stay.

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Key Points to Remember

Inheritances are not taxed in India, but the income from inherited assets is taxable.

The succession laws applicable depend on the religion of the deceased and the type of property inherited.

NRIs can inherit property from residents and other NRIs, subject to Foreign Exchange Management Act (FEMA) regulations.

Different Kinds of Properties That Can Be Inherited by NRIs in India

Non-Resident Indians (NRIs) possess legal entitlement to inherit various immovable properties in India, similar to other citizens. These properties include residential, commercial, agricultural lands and farmhouses; although NRIs generally aren't permitted to purchase agricultural lands directly themselves they can inherit them; once inherited they must sell it only to another resident Indian citizen.

Types of Properties NRIs Can Inherit

Residential Property: Homes, apartments, and residential plots.

Commercial Property: Office spaces, shops, and commercial plots.

Agricultural Land: NRIs cannot buy but can inherit agricultural land and farmhouses. They can sell these properties only to resident Indians.

Inheriting from Another NRI

When an NRI inherits property from another NRI, certain regulations must be observed. If they are both foreign citizens and NRIs, approval from the Reserve Bank of India (RBI) must also be sought prior to claiming it as their own. Furthermore, any acquisition must comply with Foreign Exchange Management Act (FEMA) regulations applicable at the time of acquisition - otherwise their inheriting NRI must first obtain this approval prior to claiming their inheritance.

Repatriation of Sale Proceeds

NRIs who sell inherited property in India face restrictions on repatriating the sale proceeds:

• If the property was inherited.
• If the property was acquired while the NRI was a resident in India.

Repatriation Limits

• Without prior RBI approval, NRIs can repatriate up to USD 1,000,000 per financial year from the sale of inherited property. This limit applies under these conditions:
•  The property was inherited from a person resident in India.
•  The property was inherited from someone who has retired from employment in India.
•  The property was inherited from a spouse who was a resident in India.
• For amounts exceeding this limit, prior RBI approval is required.
• Repatriation and Transfer of Inherited Property for NRIs
• Repatriating Sale Proceeds of Immovable Property
• NRIs wishing to repatriate the sale proceeds of inherited immovable property must meet the following conditions:

The property must have been acquired in accordance with the provisions of the Foreign Exchange Management Act (FEMA).

The acquisition amount must have been paid through permissible modes of payment.

For residential properties, NRIs can repatriate the sale proceeds of up to two properties.

To repatriate the sale proceeds, NRIs must submit Forms 15CA and 15CB, with Form 15CB signed and submitted by a chartered accountant.

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Documents Required for Transfer of Title of Inherited Property

Nomination

Nomination documents serve as the cornerstone of housing societies or apartment associations, naming nominees as trustees until formalizing transfers through probate proceedings, succession certificates or updates to property records.

Will

Wills are essential documents for property transfer upon the death of their creator, outlining their posthumous intentions for property. Wills may be registered or unregistered, typed or handwritten and even altered during life if needed. They remain revocable during that lifetime as well.

Probate

Probate is the legal process by which Wills are approved by courts in order to allow their executor to manage an estate, often necessary in cases involving contestation of Wills or deceased beneficiaries.

Succession Certificate

In the absence of a Will, heirs must file for a succession certificate from court. Documents required include death certificates for both deceased and heirs as well as birth certificates of each heir, copies of ration cards, bank statements to show ownership over property inherited, etc.

Original Purchase Deed and Registration Documents

Attributes required for ownership include original purchase deed and registration documents as well as certified copies from the registrar's office; certified copies may suffice in cases involving older properties; in housing societies, however, a Share Certificate must also be available.

Encumbrance Certificate

An encumbrance certificate is essential for recording property transactions, including sales, leases, mortgages, partitions, gifts, or releases.

Land Related Documents

Documents such as a Khata are necessary when conducting property transactions, providing evidence of ownership and possession. This document details property characteristics such as tax obligations and ownership transfers separately from registration documents; any changes in ownership must also be updated in municipal records to reflect these changes.

Property Management

NRIs living abroad often find it challenging to manage assets in India while living overseas, which makes establishing Powers of Attorney (PoAs) essential tools for remote property management. PoAs allow NRIs to delegate responsibilities efficiently while resident Indians often utilize PoAs to make property administration simpler.

Understanding Power of Attorney (PoA) for NRIs: Types, Uses, and Legal Requirements

Types of Power of Attorney (PoA)

Special PoA

A Special Power of Attorney (PoA) limits the agent's authority to specific tasks. Once the designated transaction is completed, the PoA ceases to be effective.

General PoA

General Powers of Attorney grant broad powers, empowering an agent to make decisions and transact on behalf of their principal without specific restrictions or limitations. It should be noted, however, that a Supreme Court ruling in Suraj Lamp & Industries Pvt Ltd v State of Haryana established that sale transactions cannot be completed through agreements to sell or general PoA in order to safeguard NRI property holdings.

Durable PoA

A Durable PoA remains in effect for the principal's lifetime, even if the principal becomes incapacitated. This ensures that the designated agent can continue to act on behalf of the principal regardless of their physical or mental state.

Using PoA for Real Estate Transactions

A PoA is particularly useful for NRIs managing real estate transactions, including:

• Mortgaging, exchanging, selling, or leasing property
• Collecting rent or borrowing
• Managing and settling disputes
• Performing acts required by financial institutions, insurance companies, or other contractual agreements

When multiple property owners are involved, a PoA allows a designated individual to act on behalf of all owners, streamlining the decision-making process.

Executing PoA from Abroad

For NRIs, executing a PoA from abroad can be done through two main methods:

Legalization

The signatures of the notary or judge must be authenticated by an accredited representative of the Indian Embassy/Consulate. The document must be stamped within three months of receipt in India.

Apostilization

Governed by the Hague Convention, apostilization involves certifying the signature or seal of the document's authenticator. The document must comply with Indian laws, including stamp duty payment.

Stamp Duty Implications for Inherited Property

Inherited Property via Will

Generally, stamp duty is not required for property acquired through a will. However, if there is a dispute over the will's validity necessitating probate, stamp duty may apply before court proceedings can begin. The stamp duty amount varies by state according to specific Stamp Duty Acts.

Intestate Succession

When property is inherited through intestate succession (without a will), there is typically no stamp duty obligation.

Taxation Implications for NRIs Inheriting Property

Double Taxation

NRIs need to check the tax rules in their country of residence as well as in India. This is crucial to understand the tax implications of inheriting property and any gains from its sale in both countries.

Inheritance Tax

India does not impose an inheritance tax; when NRIs inherit property there is no immediate tax liability; instead taxes only apply to any income generated from their inheritance assets - for financial assets this could mean interest, dividends or capital gains from sale while with real estate rentals income or gains are subject to taxation.

Long-Term and Short-Term Capital Gains

When NRIs sell property in India, they must pay Capital Gains Tax. The tax rate depends on whether the gain is classified as short-term or long-term:

Long-Term Capital Gains (LTCG): Property held for more than 2 years is considered a long-term asset. LTCG is taxed at 20%.

Short-Term Capital Gains (STCG): Property held for 2 years or less is considered a short-term asset. STCG is taxed according to the applicable income tax slab rates for NRIs.

For inherited property, the holding period and acquisition cost are based on the original owner’s purchase date and cost. If NRIs sell the property after holding it for over 2 years, the buyer must deduct Tax Deducted at Source (TDS) at 20%. If sold within 2 years, TDS is 30%.

Taxation on Gifts of Property for NRIs

If NRIs receive gifts of property, shares, or securities worth more than Rs 50,000, they are taxable as income in India, unless the gifts are from specified relatives or received on special occasions like marriage.

Tax Benefits for NRIs Selling Property

NRIs can avail of various tax exemptions and rebates on their LTCG liability under the Income Tax Act, 1961:

Section 54: NRIs can claim exemption from capital gains tax if they use the proceeds from selling residential property to purchase another residential property within a specified timeframe.

Section 54EC: NRIs can invest the capital gains from selling a long-term asset in bonds issued by the National Highways Authority of India (NHAI) to get a tax exemption.

Section 54F: NRIs can save taxes on long-term gains from assets other than residential property by investing in residential property in India, within specific timeframes.

Why do you Need a Lawyer?

It is important for an NRI to be aware of the laws that are going to be levied upon him/her while dealing with a property matter. Since you are away from the country, it is imperative to get professional help and you must thus connect with a good Lawyer for NRI who will understand your matter and guide you in the best possible direction. You can also get free legal help for NRI from top lawyers through the Legal Advice service by LawRato.

Advocate Chikirsha Mohanty

Greater Kailash - 1, Delhi
5 years

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