An NRI is an individual who, though an Indian citizen by origin, maintains their ordinary residence outside India for tax purposes. While residing abroad, they may still hold financial ties to their homeland.
Inheritance tax, on the other hand, refers to a levy imposed by the government on assets or property received upon the passing of an individual. This tax is often calculated based on the value of the inherited assets and can impact the recipient's financial standing.
What is Inheritance Tax and how it differs from other Taxes?
Unlike many countries, India's tax structure does not include a specific levy on inherited assets. Inheritance tax, distinct from income or capital gains tax, directly targets the value received through inheritance. While other taxes may apply to income generated from inherited assets or potential capital gains upon their sale, the act of inheriting itself does not trigger any tax burden in India.
This absence of inheritance tax presents a notable advantage for NRIs inheriting property or assets within the country. They can receive their inheritance without facing any immediate tax obligations solely due to inheriting.
Inheritance Laws for NRIs
NRIs inheriting assets in India are subject to the existing inheritance laws. These laws govern the distribution of a deceased individual's estate and determine who inherits what.
Indian inheritance laws differentiate between two primary categories of property: movable and immovable.
Movable property: This encompasses assets like cash, jewelry, or vehicles. Inheritance of movable property generally follows the principles of succession laws applicable to the deceased's religion. For instance, the Hindu Succession Act of 1956 dictates inheritance for Hindus, Buddhists, Sikhs, and Jains.
Immovable property: This refers to land, buildings, and other fixed assets. Inheriting immovable property by an NRI is permitted, encompassing both residential and commercial properties. Interestingly, NRIs can even inherit agricultural land or farmhouses, which they wouldn't be able to purchase directly due to regulations. However, the succession laws pertaining to the deceased and the location of the property will determine the inheritance process.
Tax Implications for NRIs Inheriting in India
Inheritance under FEMA: The Foreign Exchange Management Act (FEMA) regulates various financial aspects for NRIs in India, including property ownership. Fortunately, NRIs are permitted to inherit property within the country as per FEMA guidelines. This inheritance can involve both movable and immovable assets.
No Tax on Inheritance: It's essential to reiterate that the act of inheriting property in India does not incur any tax liability for NRIs. This implies that NRIs receiving assets through inheritance are not subject to any immediate tax burden solely due to inheriting.
Tax Considerations Upon Disposition: While inheriting itself doesn't trigger taxation, NRIs should be aware of potential tax implications when deciding to sell their inherited property. Capital gains tax might apply based on the difference between the inherited property's market value at the time of inheritance and the sale price.
Income Tax on Rental Income: If an NRI inherits property that generates income, such as rental income from a building, they become liable to pay income tax on that income in India. NRIs can avail of tax treaties between India and their country of residence to potentially reduce their tax burden.
Potential Taxes to Consider
While inheriting property in India itself doesn't attract tax for NRIs, it's crucial to understand potential tax liabilities that might arise in specific scenarios:
Capital Gains Tax: As mentioned earlier, NRIs selling their inherited property are subject to capital gains tax. This tax is charged on the profit earned from the sale, calculated as the difference between the inherited property's market value at the time of inheritance and the final sale price.
Long-Term Capital Gains (LTCG): If the property is held for more than 24 months from the date of inheritance, LTCG tax applies. Currently, this tax stands at 20.8% (including cess) with indexation benefits that help adjust for inflation.
Short-Term Capital Gains (STCG): If the property is held for less than 24 months, STCG tax is applicable. This tax is calculated based on the individual's income tax slab and can be significantly higher than LTCG.
Wealth Tax (Abolished): It's important to note that India abolished wealth tax in 2015. Previously, this tax applied to the net wealth of individuals, potentially impacting NRIs holding high-value inherited assets. While no longer relevant, understanding its past existence provides a more comprehensive picture of potential tax considerations.
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