Making a real estate investment in India is one of the major decisions for most of the NRIs as it involves various types of tax and regulatory implications. However, taking ownership of a property through inheritance is a different scenario altogether. Inheriting an immovable property is not a choice, but, it is something which is handed down from one generation to another. Below is a handy guide for NRIs to understand the important implications that they need to consider while dealing with an immovable inherited property in India:
Types of inheritance
From agricultural lands and farm houses to residential and commercial properties, NRIs can inherit any kind of immovable property in India. He or she can inherit real estate properties from a person living in India or elsewhere. In case, if the property is inherited from another NRI, it is important to take necessary permissions from The Reserve Bank of India. The individual from whom the property is inherited should have acquired the same by the provisions and guidelines mentioned in The Foreign Exchange Management Act, applicable at the time of the acquisition. A property which was acquired without following the FEMA guidelines cannot be inherited by both NRI and PIO.
Taxation at the time of inheritance
Neither the inheritor nor the person from whom the property is being inherited, have to pay any kind of tax at the time of inheritance. However, if an individual is transferring an immovable property as a way of gift and the value of the property is above Rs.50,000, the inheritor should include the market value of the property received in his total income.
Taxation on continued ownership of inherited property
There are a few tax implications that an NRI needs to keep in mind during the period of his ownership. In case, the inherited property is rented or leased out; then he has to pay a proportion of his earnings as per the income tax laws. On the other hand, if the NRI decides to keep an inherited property vacant to reside in it during his occasional visits, no taxation is involved on such a property. Also, if he owns more than one property apart from the inherited property; then he has to select a property as self-occupied and offer notional rent on other properties depending upon the rental income that the property would fetch in that particular time frame.
Taxation at the time of sale of the inherited property
An NRI is free to own a property and dispose of it whenever he wishes to do so. An NRI can sell immovable inherited property in India only after getting the necessary permissions from The Reserve Bank of India. But, there are a few restrictions that must be considered if an NRI plans to gift his inherited property to any of his successors. The most important factor is that an NRI can gift his inherited property either to an Indian resident or another NRI. He is not eligible to gift his property to an individual who has a citizenship of another country. In case, if the NRI is gifting his inherited property to a non-relative, then the recipient is liable to pay tax based on the market value of the immovable property that he receives as a gift.
Capital gain implications
A sale of a property is qualified as long term capital gains if the combined holding period of the inheritor and the deceased is above 24 months. For immovable properties acquired after April 1, 2001, the cost at which the property was purchased by any of the previous owners is taken as the cost of acquisition. But, if an NRI plans to sell a property that was inherited before April 1, 2001, then he can calculate the cost of acquisition based on the market value of the property as on April 1 2001. When it comes to long term capital gains, NRI can either pay the property tax at the rate of 20 per cent, or he can make a real estate investment and avail tax benefits as per the Section 54 and 54F of the Income Tax Act.
When it comes to repatriation of sale proceeds, an amount up to one million dollars can be transferred for an inherited property without any permissions from RBI provided all the necessary taxes have been paid in India during the sale of the property. For special cases of inheritance, it is always advisable to consult a professional lawyer or a chartered accountant to know specific NRI taxation policies.