Law on Inheritance of Property for NRIs in India

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.

Lets examine the laws governing inheritance of immovable property in India by NRIs

What is inheritance of property in India?

Inheritance is transferring of the property, debts, titles, rights and obligations by a person after his/ her demise  to another person.

How can a person legally inherit property in India?

Under the established Indian laws of succession/ inheritance, a person can inherit a property in 2 specific ways:

1. Through a Will or
2. Through laws of succession when the person dies intestate
   
   

Who is a Non Resident Indian (NRI)?

• A Non Resident Indian is an Indian Citizen who does not reside in India for more than 182 days during the course of the previous financial year, or
• who has moved out of India or who resides outside India for the objective of employment, or
• who has moved out of India or who resides outside India for carrying on business or employment outside India, or
• who has moved out of India or who resides outside India for any other purpose suggesting his intention to reside outside India for an unspecified period of time.
  
  

What are the different types of properties that can be inherited by NRIs in India?

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, RBIs 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.

Burden of tax at the time of inheritance of property for an NRI in India

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.

Taxation burden on continued ownership of inherited 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.

Taxation burden during gift or sale of the property

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.

Capital gains on property inherited by an NRI

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 1^st April 2001. And in case the property was purchased before 1^st April 2001, the seller has the right to take the market value of the property as on 1^st 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.

Repatriation of the sale proceeds of an inherited property

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 property being sold has been obtained according to the foreign exchange regulations significant during that time period.
• The total amount getting repatriated must not exceed the cost of the sale proceeds from the transaction.
• An NRI can only repatriate sale proceeds from a maximum of 2 residential properties.
• The maximum amount of repatriated funds from a Non Resident Ordinary (NRO) account is fixed at $1 million for a fiscal year.
• Funds can be repatriated only after rectifying all the relevant taxes and other additional charges.
  
  

What are the requisite documents needed to transfer title of inherited property in India?

The following are the essential documents that are must to execute transfer of title in an inherited property in India:

• A registered Will: According to Indian law, it is not mandatory for a Will to be registered, it can just be written on a plain piece of paper.
  
  However, registration of a document makes it a valid document in the eyes of law that may or may not have to be presented in a court. Therefore, it is highly recommended to get every Will registered. Besides, the person can always keep amend a registered Will.

• A succession certificate: In case there is no Will then during its absence, the legal heirs will be required to obtain a Succession certificate from the court.
  
  

  The legal heirs will have to present the following documents, for instance,

1. The death certificate of the deceased person to prove the exact time of the demise,
2. Details of the residence of the deceased
3. Details of the property in question
4. Birth certificate of the legal heirs to disclose their details,
5. Copy of the ration card of the legal heirs,
6. Bank statement of the legal heirs etc.
7. Absence of any obstruction towards the grant of the succession certificate
   
   

These documents are mandatory to prove that the legal heirs are indeed the rightful successors of the property in question.

• Original property purchase deed as well as the registration documents: In case of an old property, the original property purchase deed might not be available.
  In such a situation, the inheritor would be required to obtain certified copies of the title deed from the jurisdictional Registrar's office under whose jurisdiction the said property is present.
• Encumbrance certificate: An encumbrance certificate is a compulsory document applicable in transactions of property as a proof of free ownership/ title. Besides this, an encumbrance certificate registers and reviews all the transactions that occur in connection with an immovable property be it a sale, gift, lease, mortgage, partition, release, etc. The encumbrance certificate for property can be acquired from the Sub-Registrar office where the property in question has been registered.

• Khata: A Khata is primarily a revenue document (official record), describing the evaluation of a property, indicating entire details of the property such as its size, built up area, location and so on in the records of the Municipality/ Corporation for the objective of payment of property tax.
  
  A khata further contains additional details like the name of the owner of the property, type of property, details of taxes paid/ to be payable etc. against the property. A khata is fundamentally a piece of evidence of who owns as well as possesses the said property.
  
  

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.

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