Provisions under the Income Tax Act, as well as the Foreign Exchange Management Act (FEMA), are suitable to the inheritance of immovable property in India and its continued ownership by PIOs or NRIs. We examine these laws-
Types of land and properties that can be acquired in India by NRIs
A person of Indian origin (PIO) or non-resident Indian (NRI), can inherit any immovable property in India, whether it is commercial or residential. They can even inherit a farmhouse or agricultural land, which they are otherwise not allowed to acquire by way of purchase. An NRI can inherit the land and property from anyone including his relatives.
The PIO or NRI can inherit property in India even from another PIO or NRI, subject to certain conditions. The RBIs permission is necessary if the inheritance results in favour of a citizen of a foreign state, who is a resident outside India.
It is essential to note that the person from whom the NRI inherits the property, should have obtained the property being bequeathed, according to the provisions of law relating to foreign exchange, prevalent at the relevant time. Thus, if the property in question was acquired without taking permission from the Reserve Bank of India(RBI) when the permission was required to be obtained, such property cannot be inherited by the PIO or NRI, without specific permission of the RBI.
Tax incidence at the time of inheritance of the property
As Estate Duty was removed long back, there is no tax percentage at the time of inheritance. Thus, neither the representative of the deceased nor the inheritor, have to pay any tax on the incidence of inheritance. In a situation, when the same property is transferred by the individual during his lifetime through the way of a gift, and the value of the property exceeds Rs 50,000. The recipient has to include the market value of the property received as a gift in his total income if he is among the stated relatives of the donor.
Taxation on continued ownership of inherited property
The PIO or NRI can continue to retain the ownership of the property or dispose of it. Even if the NRI decides to discard the property, there are several tax implications for the period during which he holds the ownership of the property.
- As wealth tax has been eliminated in India, the NRI does not have any wealth tax allegations, for being the owner of the immovable property and land.
- If the NRI is a non-resident for income tax laws, based on his stay in India, he will have to offer the income obtained from the inherited property in India.
- In a matter when the NRI decides to keep the inherited house property vacant, to reside in it throughout his visit to India, he does not have to give any income for taxation on such property.
- But, in case he owns more than one house property, together with the inherited property and keeps them vacant, he has to keep one property as self-occupied and offer national rental income, concerning the other properties, based on the amount of rent which the property would retrieve in the market.
- The non-resident Indian (NRI) will have to file his income tax return in India if his total revenue from all the sources including the rental as well as national rental income exceeds the basic exemption limit.
Taxation incidence at the time of gift or sale of the property
An NRI can either gift away the inherited property or sell the same and remit the funds outside India. There are some limitations on gifting of the property by an NRI.
- The NRI can gift the inherited property, only to a person who is resident in India or PIO or an NRI. He cannot gift the property to an individual who is neither of these. In case of a gift to a non-relative, the beneficiary will have to remit tax on the market value of the property and land that is acquired in the form of a gift.
- If an NRI or PIO wants to sell his property to another NRI or PIO, he has to first take prior permission from the RBI. Moreover, if the NRI wants to sell an inherited plantation land, agricultural land or a farmhouse, the same can be sold to a citizen of India and a resident.
- But, if the NRI inherited the property or owned the property, even though he was a resident of India then he can deal with the property the way he wants, through means of rent, sale, transfer or gift.
- Foreign nationals of non-Indian origin, a resident outside India, are not allowed to obtain any immovable property in India except such property is acquired through the way of inheritance from an individual who was resident in India.
- Foreign citizens of non-Indian origin, who have obtained immovable property in India through the way of inheritance, with the special approval of the RBI, cannot transfer or sell such property, without prior permission of the RBI.