For starters, any transfer of property to non-resident Indians (NRIs) and persons of Indian origin (PIOs) must comply with the Foreign Exchange Management Act (FEMA). The person bequeathing the property should have also acquired it in compliance with FEMA regulations or any other foreign exchange law in force at the time of acquisition of the property.
A Chartered Accountant qualified in 1979, Khosla worked overseas with KPMG for 2 years and practiced professionally for a decade before founding MyMoneyMantra 1989. He is a highly regarded figure in the financial products distribution arena and advises several banks on their distribution strategy.Purchasing real estate usually requires months of planning. Sometimes you can also acquire property as a sudden windfall through inheritance. The transfer of ownership of inherited property is not very complicated if you are an ordinary citizen of India. However, the rules are different when it comes to Indians settled abroad.
For starters, any transfer of property to non-resident Indians (NRIs) and persons of Indian origin (PIOs) must comply with the Foreign Exchange Management Act (FEMA). The person bequeathing the property should have also acquired it in compliance with FEMA regulations or any other foreign exchange law in force at the time of acquisition of the property. If the inheritance is in favour of a foreign national, permission is required from the RBI for the transfer.
Inheritance through a Will
Anybody can transfer property in India through a Will. However, permission from RBI is mandatory for executing this Will, if the beneficiary is an NRI or PIO. Writing an unambiguous and legally valid Will is recommended because it smoothens the process for the heirs. If the owner of the property dies intestate (without a Will), the NRI legal heir will have to run around to obtain a succession certificate from a court. The legal procedures will not be easy for a person settled abroad.
An Indian resident can also gift a property to an NRI. Rules say that an NRI or a PIO can only purchase residential or commercial real estate, but not agricultural land or a farmhouse. However, there is no restriction if the agricultural land or farmhouse comes as inheritance or is gifted to the individual. This inheritance can come even from a non-relative.
Tax implications of inheritance
From a legal standpoint, it is important to distinguish between an inheritance and a gift. Inheritance comes after the death of the owner, while a gift can be given while the person is alive. There is no tax on inheritance in India. But gifts are taxable if given to somebody who is not in the list of specified relatives. The recipient of the gift will be taxed if the value of the gift exceeds Rs 50,000.
Though there is no tax on inheritance in India, individuals who acquire property are liable to pay tax on rental income and capital gains from its sale. There is no tax if the NRI owns only one property in India. But if there is more than one property, one of the houses can be declared as self-occupied while the rent from other properties will have to be declared in the tax return. Even if the properties are lying vacant, the NRI owner will be taxed on notional rental income at the market rates.
Tax on capital gains and TDS
If an NRI wants to sell the inherited property that was acquired more than two years ago, he will be taxed 20% on long-term gains after indexation. If property was acquired less than two years ago, the gains will be added to the income of the individual and taxed at normal rates. Please note that the date of purchase and price paid by the original owner will be considered for calculating these gains.
When an NRI sells property, the buyer is mandated to deduct TDS and deposit the amount with the government, on behalf of the seller. TDS will be 20% in case the property is sold after two years of purchase and 30% in case it is sold within two years. If no tax is payable, the TDS can be claimed as a refund by filing income tax return.
Saving capital gains tax
NRIs can claim exemption for the long-term capital gains from sale of property in India. Under section 54, they can escape tax by using the long-term capital gain amount to buy a new property. This can be done one year before the sale or two years after the sale of the property. The gains can also be used in construction of property, but it must be completed within three years from the date of sale. Only one house property can be purchased or constructed from capital gains to claim this exemption. Also, it has to be situated in India.
If an NRI is unable to invest the capital gains until the date of filing of return of the financial year in which the transaction took place, he can deposit the gains in the Capital Gains Account Scheme of a PSU bank. Exemption is also available under section 54F for non-residential property. In this case, the entire sale proceeds are required to be invested to buy a house. The long-term capital gains can also be invested in 5-year NHAI or REC bonds. NRIs are given six months to invest in these bonds and a maximum Rs 50 lakh can be invested in a financial year.
Repatriating sale proceeds from India
One big concern is the repatriation of sales proceeds from India. One can repatriate property sales proceeds of up to $1 million (Rs 7.4 crore) in a financial year after obtaining permission from the RBI. The amount cannot exceed:
1. The amount paid for acquisition of the property in foreign exchange received through normal banking channels or out of fund held in the Foreign Currency Non-Resident account
2. The foreign currency equivalent as on the date of payment, of the amount paid where such payment was made from the funds held in Non-Resident External account for the acquisition of the property.
Please note that such repatriation from sale of residential properties cannot be done more than two times by an individual.
Since all of the above issues are not that simple, it would be best to avail detailed advice from a qualified professional.