Understanding Inheritance Tax Implications for NRIs in India

Are you an NRI with assets in India, wondering how inheritance tax laws might impact your earnings? Or a resident Indian holding assets abroad, unsure about the tax implications for your heirs? 

When an individual meets their death, their assets may be transferred to their heirs. However, the tax implications can vary greatly, depending on the recipient's residency status. 

Even though there is no tax on inheritance as of March 1985, tax does apply on income generated by the assets in India. Learn more about tax obligations related to inheritance for NRIs in this blog.

Quick Synopsis

• NRIs do not pay tax at the time of inheriting assets such as cash, property, jewellery, or securities.
• Tax applies only on income from inherited assets.
• Selling inherited property or assets attracts long-term or short-term capital gains tax depending on the holding period.
• NRIs can inherit Both movable and immovable assets freely under FEMA:
• Rental income from inherited property is taxable, but DTAA benefits may reduce tax burden.
• No wealth tax applies on inherited assets since 2015.

Tax on Inheritance as Applicable in India for NRIs 

An NRI may inherit different categories of assets, including:

• Cash 
• Immovable property like agricultural land, farmhouses, plantation properties, etc.
• Movable property like jewellery, shares, art, cars, etc.

While no tax is applicable on the assets which are acquired at the time of inheritance, tax applies to income arising from said assets in India. Here’s how tax applies to these categories:

Tax on Inherited Asset-Based Income 

The Income Tax Act, 1961 specifies: 

Immovable Property

• Self-occupied property does not have tax implications in the case of heirs. However, only up to 2 properties shall be pronounced as self-occupied properties within a single financial year (the April–March period).
• One shall be liable to pay taxes on their income from collecting rent on rented properties. This income amount will be arrived at after considering standard deductions and municipal taxes.

Asset Apart from Immovable Property

• If one has earned interest from the inherited bonds, fixed deposits or debentures, taxes apply to such types of income. This earning is grouped under ‘Income from Other Sources’.
• If one has received a dividend from mutual funds/inherited shares, the dividend income that is received is taxable. It will be grouped under ‘Income from Other Sources’.
• The income types are subject to taxation at the established rate, as per the taxpayer's income slab. This is determined on the basis of the total income within a financial year and the tax regime that said taxpayer has chosen.

Tax on Inherited Asset Sale 

If one owns a property for over 24 months, it shall be considered a long-term asset. The Income Tax Act, 1961, further specifies: 

Immovable Property

• If one inherits a property, the holding period of the prior owners before is also to be considered. So, the sale of such a type of property does result in long-term capital gain in usual cases.
• According to Section 49(1) of the IT Act, 1961, for capital gains calculation for such scenarios, the costs incurred by the preceding owners need to be accounted for. 

Shares & Securities Which Are Listed

• If one receives shares/securities from a relative, tax implications do not apply on the inheritance date. However, if they receive the same from a non-relative, the associated Fair Market Value (FMV) shall be considered in order to calculate the tax liability on the inheritance date.
• If one sells the share after holding it for over 12 months, it shall be categorized as a long-term capital gain.

Asset Apart from Immovable Property

• If one inherits the asset, the holding period of the last owners is also considered. However, the sale of such a type of property does result in long-term capital gain in usual cases.
• According to the IT Act’s Section 49(1), during the calculation of the capital gain in such cases, costs incurred by the owners before the need to be considered.

Inherited Property-related Tax liability for an NRI 

1. Inheritance under FEMA: According to the guidelines of FEMA, NRIs shall be able to inherit movable as well as immovable assets in India. This includes property as well. No immediate inheritance tax on property is applicable.
2. Considerations for Tax on Disposition: The capital gains tax shall apply when the sale of inherited property is in question. This is based on the difference between the market value during the time of inheritance and the sale value of the property later on.
3. Income Tax Applicable on Rental Income: NRIs will be liable for income tax on any rental income from the inherited properties. However, they can also gain from tax treaties between their country of residence and India.

Tax Implications of Inherited Property Sale by an NRI 

For an NRI selling inherited property in India, tax implications do apply in the following forms:

1. Capital Gains Tax: NRIs who are selling their inherited property are subject to capital gains tax upon the profits made from the sale:

• Long-Term Capital Gains (LTCG): It is applicable when a property is held for over 24 months from the inheritance date. The tax rate is 12.5%, which comes without indexation benefits.
• Short-Term Capital Gains (STCG): It is applicable when a property is held for less than 24 months. The tax rate in this case is based on the individual's income tax slab.

1. Wealth Tax: It was abolished in 2015. So, it no longer applies to NRIs or anyone else.

Final Word 

NRIs, PIOs and OCIs are permitted to inherit assets in India as per the FEMA and IT Act guidelines. Inheritance tax does not apply anymore, but selling inherited assets/making profits from them does attract tax liabilities. 

You can navigate such complexities and ensure compliance by consulting a tax expert who can provide personalised guidance on managing your inherited assets as an NRI.