This article discusses the tax processes of estate laws held by NRIs in India. NRIs are subject to tax benefits and property and estate tax depending on the nature of their assets and the article elucidates on this aspect in detail. It also discusses various exemptions that NRIs can avail subject to certain conditions.
Estate of a person is everything comprising the net worth of an individual, including all land, possessions and other assets. Legally, estate refers to an individual’s total assets minus any liabilities.
Estate tax is levied on an heir’s inherited portion of an estate if the value of the estate exceeds an exclusion limit set by law. The estate tax is mostly imposed on assets left to heirs, but it does not apply to the transfer of assets to a surviving spouse. The right of spouses to leave any amount to one another is known as the unlimited marital deduction, but when the surviving spouse who inherited an estate dies, the beneficiaries may then owe estate taxes if the estate exceeds the exclusion limit.
NRIs who are selling house property, which is situated in India have to pay tax on Capital Gains. The tax that is payable on the gains depends on whether it is a short term or long term capital gains. When a house property is sold, after a period of 2 years from the date it was owned- there is a long term capital gain. In case it is held for 2 years or less - there is a short term capital gain.
Tax implications for NRIs are applicable in the case of inheritance. In case the property has been inherited, we need to consider the date of purchase of the original owner for calculating whether it is a long term or short term capital gain. In such a case, the cost of the property shall be the cost to the previous owner.
Long term capital gains are taxed at 20% and short tern gains shall be taxed at the applicable income tax slab rates for the NRI based on the total income, which is taxable in India for the NRI.
When an NRI sells property, the buyer is liable to deduct TDS @ 20%. In case, the property has been sold before 2 years (reduced from the date of purchase), a TDS of 30% shall be applicable.
Long-term capital gains (when property is held for more than 3 years) are taxed at 20%. Do note that long-term capital gains earned by NRIs are subject to a TDS of 20%.
NRIs are allowed to claim exemptions under Section 54, Section 54 EC, and Section 54F on long-term capital gains. Therefore, an NRI can take benefit of the exemptions from capital gains at the time of filing a return and claim a refund of TDS deducted on Capital Gains.
Exemption under Section 54 is available on long-term capital gains on sale of a house property. Exemption under Section 54F is available on sale of any asset other than a house property.
In the Budget for 2014-15, it has been clarified that only ONE house property can be purchased or constructed from the capital gains to claim this exemption. Also, starting assessment year 2015-16 (or financial year 2014-15), it is mandatory that this new house property must be situated in India. The exemption under section 54 shall not be available for properties bought or constructed outside India to claim this exemption. (Do remember that this exemption can be taken back if you sell this new property within 3 years of its purchase).
If you have not been able to invest your capital gains until the date of filing of return (usually 31st July) of the financial year in which you have sold your property, you are allowed to deposit your gains in a PSU bank or other banks as per the Capital Gains Account Scheme, 1988. In your return claim, this will show as an exemption from your capital gains; you do not have to pay tax on it.
It is available when there is a long term capital gain on the sale of any capital asset other than a residential house property. To claim this exemption, the NRI has to purchase one house property, within one year before the date of transfer or 2 years after the date of transfer, or construct one house property within 3 years after the date of transfer of the capital asset. This new house property must be situated in India and should not be sold within 3 years of its purchase or construction.
Also, the NRI should not own more than one house property (besides the new house) and nor should the NRI purchase, within a period of 2 years or construct within a period of 3 years, any other residential house. Here the entire sale receipts are required to be invested. If the entire sale receipts are invested, then the capital gains are fully exempt otherwise the exemption is allowed proportionately.
when a capital gain from sale of the first property is reinvested into specific bonds:
The NRI must make these investments and show relevant proof to the buyer to get no TDS deducted on the capital gains. The NRI can also claim excess TDS deducted at the time of return filing and claim a refund.
For long-term capital gains made from the sale of transfer of the foreign assets, there is no benefit of indexation and no deductions allowed under Section 80. But you can avail an exemption on the profit under Section 115 F when the profit is reinvested back into:
In this case, capital gains are exempt proportionately if the cost of the new asset is less than net consideration. Remember, if the new asset purchased is transferred or sold back within 3 years, then the profit exempted will be added to the income in the year of sale/transfer.
The benefits above may be available to the NRI even when he/she becomes a resident until such an asset is converted to money, and upon submission of a declaration for the application of the special provisions to the assessing officer by the NRI.
The NRI may choose to opt out of these special provisions and in that case, the income (investment income and LTCG) will be charged to tax under the usual provisions of the Income Tax Act.Copyright 2023 – Helpline Law - HLL001