In India, dealing with real estate matters can be extremely tormenting especially for a Non Resident Indian (NRI) since transfer of property laws work hand in hand with the provisions of the Foreign Exchange Management Act (FEMA), 1999 and the Income Tax Act, 1961 are both applicable while inheriting an immovable property and its continued ownership by NRIs or even PIOs/ OCIs. The individual who receives the property asset is known as the inheritor and the procedure is known as inheritance.
Indian sensitivity aka diplomacy aka hypocrisy holds back the heirs from asking for property documents/ assets before the demise of their parents. Due to this, the heirs land up running around a lot to settle the inheritance procedure.
Inheritance is transferring of the property, debts, titles, rights and obligations by a person after his/ her demise to another person.
Under the established Indian laws of succession/ inheritance, a person can inherit a property in 2 specific ways:
An NRI just like any other Indian citizen can inherit any type of immovable property in India, whether the property is residential or if its commercial. In fact, NRIs have a legit right to inherit agricultural lands as well as farmhouses, which otherwise is prohibited by way of purchase under Indian transfer of property laws.
Additionally, an NRI can inherit any property from family as well as relatives. Besides this, an NRI can also inherit property from another NRI, but subject to certain regulations. For instance, RBI’s approval is mandatory in case the inheritance results in favour of a foreign citizen, who is a non resident Indian (NRI).
It is essential to remember that the individual from whom the NRI inherits the property, must have obtained the property being bequeathed, in accordance with the provisions of the prevalent law relating to foreign exchange, established at the time of the purpose. Therefore, if the property in question was obtained without acquiring permission from the Reserve Bank of India, when the approval was needed to be acquired, then such property cannot be inherited by the NRI, without prior permission (to be specified) of the RBI.
Ever since the ‘estate duty’ got abolished in India, there is no more burden of tax during the time of inheritance. As a result, neither the inheritor nor the representative of the deceased person have to pay any tax/ duty at the commencement of inheritance.
However, in case the same property is transferred by the person during his lifetime by way of a gift and the value of the property exceeds Rs. 50,000/-, then the person receiving the property has to add the market value of the property received as gift in his total income, except if the person getting the property falls under the specified relatives of the person gifting the property.
An NRI can continue to retain the property ownership, or sell it off. Besides this, even if the NRI chooses to sell off the property, there are specific tax consequences for the period during which he retains the property ownership. Moreover, since wealth tax has been scrapped in India, an NRI does not have to deal with any implications pertaining to wealth tax, for being an owner of an immovable property.
However, according to law, in case the NRI is a non- resident for the motive of income tax laws, based on his visit in India, the NRI will have to furnish the income earned from the property inherited in India. And if the NRI chooses to keep the inherited house property unoccupied, for the motive of staying in the property during his stay in India, then the NRI does not have to furnish any income for taxation on the property. Although, if the NRI owns more than 1 house property, including the inherited property and keeps all of those unoccupied, then the NRI has to decide to keep 1 property as self-occupied and furnish estimated rental income, with regards to the other unoccupied properties, which would be based on the rent amount that the property would collect in the market. Furthermore, the NRI will have to file his income tax return in India, in case the total income of the NRI from all the different sources including the rental and/ or estimated rental income is more than the basic exemption limit as stipulated by the income tax department.
A Non- Resident Indian can either give away the inherited property as a gift or sell the property and transfer the received money outside India. However, there are specific limitations on gifting a property by an NRI.
An NRI can only gift the inherited property, to an Indian resident or an NRI or an Overseas Citizen of India (OCI). In addition, if the gift to a non- relative of the NRI, then the recipient of the property will have to pay tax based on the market value of the property which he has received as a gift.
Now, in case an NRI wishes to sell his property to another NRI, then the primary step is to acquire prior permission from the Reserve Bank of India (RBI). Similarly, if an NRI wishes to sell his inherited agricultural land, farmhouse or a plantation land, the same can be sold to an Indian resident and/ or an Indian citizen.
Although, in case the NRI inherited or owned a property, during when he was an Indian resident, then he can deal with the property the way he desires i.e. by means of rent, transfer, sale or gift.
Apart from this, non Indian origin foreign nationals, who reside outside India, are not allowed to obtain any kind immovable property in India, except when such a property is obtained by way of inheritance from a person who was an Indian resident. Non Indian origin foreign nationals, who have obtained immovable property in India by way of inheritance, with the desired permission of the RBI, do not have the right to transfer or sell any such property, without getting prior approval from the RBI.
According to Section- 195 of the Income Tax Act, 1961 any person who buys property from an NRI will have to deduct income tax on the taxable amount of the capital gains at the rates as applicable under law.
Besides this, in case the integrated holding period of the person inheriting the property and the deceased person has crossed 24 months, then the profits earned on such sale shall certify as long- term capital gains. Now, for the purpose of calculating capital gains, the cost at which the property was bought by any of the previous owners, shall be considered as the cost of purchasing if the property was purchased after 1st April 2001. And in case the property was purchased before 1st April 2001, the seller has the right to take the market value of the property as on 1st April 2001, as its cost and apply the indexation on this, for calculating the capital gains.
An NRI has the option to either pay the tax on such long term capital gains at 20%, or utilize the tax benefits under Section- 54 and Section- 54F, by investing in a new residential house. Alternatively, the NRI has an additional option to invest up to Rs. 50 lakh in a year, in capital gains bonds of specified institutions like Rural Electrification Corporation or National Highways Authority of India or Power Finance Corporation and Railway Finance Corporation, within specified time limits.
An NRI can repatriate the sale proceeds up to 1 million dollars every year, without taking prior permission from the RBI, provided the taxes for the sale of such property have been paid in India. However, special RBI permission will be required, if the amount to be recovered is more than 1 million.
The following are the conditions:
The following are the essential documents that are must to execute transfer of title in an inherited property in India:
Apart from this, a khata is also a type of identification of the person who is essentially liable to pay property tax for the property concerned. Additionally, a khata is one of the key documents that are required when the owner of the property needs a trade license or a building licence or a loan from a bank or any other financial institution.