Tax implications in India for NRIs on receiving inheritances

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From ancestral homes in India to investments abroad, inheriting assets as a Non-Resident Indian (NRI) has its own tax implications. Tax treatment on inheritances changes depending on whether the assets are received from relatives or friends who reside In India or abroad. This article explains the tax rules for receiving inheritances as an NRI.

Understanding inheritances

The receipt of assets under inheritance is regulated by the Foreign Exchange Management Act, 1999 (FEMA), and the Income Tax Act, 1961 (IT Act). 

As per the IT Act, any asset that you receive by way of Will or inheritance, or in contemplation of death of the payer is termed as ‘inheritance’. 

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

Tax on inheritance in India for NRIs

Generally, there is no tax on the assets acquired at the time of inheritance. However, income arising in India from the inherited assets will be subject to tax at the hands of the heir, basis the IT Act 1961, as under: 

Income from inherited asset

Immovable property

• Self-occupied property has no tax implications for heirs. However, interest deductions on home loans and other rules apply under the Income-tax Act.* Also, only up to two properties can be claimed as self-occupied properties in a financial year (April–March)
• Rented property makes you liable to pay tax on rental income after considering the municipal taxes and standard deductions

*Section 24 of the Income Tax Act, 1961.

To know more about the tax implications as an NRI landlord, click here.

Asset other than immovable property

• If you have received dividend from inherited shares or mutual funds, then the dividend income received is taxable as income from other sources
• Additionally, if you have earned interest income from inherited fixed deposits, bonds, or debentures, then this income also becomes taxable as income from other sources
• These incomes are subject to taxation at the applicable rate, depending on the income slab of the tax payer, which is determined based on total income in a financial year and the tax regime the tax payer has opted for

Click here to read more on income tax rates for NRIs.

Sale of inherited asset

Immovable property:

When a property is owned for more than 24 months, it is considered a long-term asset.

• If you inherit a property, then the holding period of the previous owners is also taken into consideration. Therefore, in most cases, sale of such property will result in long-term capital gain
• As per section 49(1) of the Income Tax Act, 1961, while calculating the capital gain for such cases, cost incurred by the previous owners must be considered. If the property was acquired before April 1, 2001, the cost of the property would be higher of:
  
  • Actual cost of acquisition of the property or;
  • Fair market value as on 1.4.2001*.

*Section 55 of the Income Tax Act, 1961

Listed shares and securities

• If you receive shares and securities from a relative, there are no tax implications on the date of inheritance. But if you receive shares from a non-relative, the Fair Market Value (FMV) of such shares will be used to calculate the deemed tax liability on the date of inheritance
• Holding period of the previous owners shall also taken into consideration for the purpose of computation of capital gains.
• Further, if you sell the share after holding it for more than 12 months (including the period of holding of previous owner), it will be classified as a long-term capital gain
• If the asset was acquired before April 1, 2001, the cost of the asset shall be taken as the higher of the actual cost to the previous owner or the Fair Market Value (FMV) as on April 1, 2001
• As per section 112A of the Income Tax Act, 1961, any long term capital gain exceeding ₹1.25 lakh in either of the above categories, will be subjected to tax
• If you have inherited any listed shares, equity oriented mutual fund units, or business trust units which has been acquired by previous owner before February 01, 2018, the cost of the asset will be the higher of:
  • The actual price you paid to buy it (cost of acquisition), and
  • The lower of these two:
    • The highest price quoted on a recognised stock exchange on January 31, 2018 (fair market value), and
    • The price at which you sold the asset.
    • Fair market value means the highest price of the asset on a recognised stock exchange on January 31, 2018.

Click here to read more about your tax liabilities while investing in the Indian stock market.

Any other asset (example movable property including unlisted shares):

When an asset is owned for more than 36 months, it is considered a long-term asset. Whereas for unlisted shares the threshold is 24 months

• If you inherit the asset, then the holding period of the previous owners is also taken into consideration. Therefore, in most cases, sale of such assets will result in long-term capital gain
• As per section 49(1) of the Income Tax Act, 1961, while calculating the capital gain for such cases, cost of previous owners must be considered. If the asset was acquired before April 1, 2001, the cost of the asset would be higher of:
  
  • Actual cost of acquisition of the property or;
  • Fair market value as on 1.4.2001**

**Section 55 of the Income Tax Act, 1961

Please note, as an NRI, you will also need to consider the tax laws in your country of residence. Read more about how NRIs can claim benefits under the Double Taxation Avoidance Agreement (DTAA).

Repatriation rules for inheritances

As an NRI, if you sell any asset inherited by you, the sale 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, regardless of the property's origin or purchase details. However, if you have inherited agricultural land, plantation property or a farmhouse, you cannot repatriate the sale proceeds from such properties outside India. To know more about restrictions on repatriation of funds held in NRE/NRO/FCNR (B) accounts, click here

Disclaimer:

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