In India, Non-Resident Indians (NRIs) are subject to the country's succession laws concerning the inheritance of property situated within Indian territory. It is imperative to distinguish between movable and immovable assets as their inheritance regulations vary. Movable assets comprise items such as bank accounts, stocks, and jewelry, whereas immovable assets include land, houses, and real estate.
Regarding the inheritance of movable assets, Indian succession laws apply based on the religion of the deceased individual. The Hindu Succession Act, Indian Succession Act, Muslim personal laws or Uniform Civil Code may be relevant depending on the state and religious affiliation of the deceased.
Concerning the inheritance of immovable property, regulations diverge depending on whether the property is self-acquired or ancestral. Self-acquired property can be disposed of through a will, while ancestral property follows succession rules, which may be influenced by religious beliefs and regional customs.
Who are NRIs
The word NRI has not been explicitly defined in any act or legislation, however, by the definition of the term "Person resident in India" as defined in two Acts namely, Income Tax Act, 1961 and Foreign Exchange Management Act 1999 ("FEMA"), we can understand that-
- A NRI is an Indian Citizen as under the law who has not inhabited in India for more than 182 days during the previous financial year, or
- who has left India or who inhabit outside India in another country with the intention to get employed in that country, or
- who has left India or who inhabits outside India in another country to carry his/ her business or employment in that country, or
- who has left India or who inhabits outside India in another country with an intention suggesting his/ her objective to stay outside India in another country for an undetermined period of time.Top of Form
Different kinds of properties that can be inherited by NRIs in India
NRIs, akin to other Indian citizens, possess the legal entitlement to inherit various categories of immovable property within India, encompassing residential, commercial, agricultural lands, and farmhouses, (According to the FEMA and the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2018, NRIs cannot purchase agricultural land but he/she is free to inherit the agricultural land, therefore, NRIs can sell the inherited agricultural land only to the resident Indian). Notably, NRIs enjoy the legitimate right to inherit agricultural lands and farmhouses, a privilege typically restricted for acquisition under Indian property transfer laws. This inheritance extends to properties bequeathed by family members and relatives.
However, the inheritance of property from another NRI is subject to specific regulations. In instances where the beneficiary of the inheritance is a foreign citizen, who is also an NRI, obtaining approval from the Reserve Bank of India (RBI) becomes mandatory. Furthermore, it is crucial to emphasize that the individual bequeathing the property to the NRI must have acquired the said property in adherence to the prevailing FEMA regulations at the time of acquisition.
Consequently, if the acquisition of the property occurred without obtaining requisite permission from the RBI when mandated, the NRI cannot inherit the property without obtaining prior approval from the RBI.
Repatriation of sale proceeds of immovable property in India
If a person resident outside India acquired the immovable property situated in India from the following modes, then he cannot repatriate the sale proceeds from such property without the prior permission from the RBI:
- If the property is acquired by him by way of inheritance;
- If the property was acquired by him when he was resident of India.
However, repatriation up to USD 1,000,000 (US Dollar One million only) is allowed for a NRI if the property is acquired by him through the following persons:
- Immovable property situated in India acquired from a person resident in India by way of inheritance;
- From a person who has retired from employment in India;
- From a person who has inherited immovable property from the spouse who is resident in India.
RBI approval is required if remittance is in excess of USD 1,000,000 (US Dollar One million only) per financial year.
But if the sale proceeds of immovable property should be repatriated then it is subject to the following conditions:
- The immovable property should be acquired in accordance with the provisions of FEMA;
- The amount paid for acquisition should be any one of the permissible modes of payment;
- If the immovable property is a residential property, then an NRI can repatriate sale proceeds of two properties.
Therefore, the NRI must submit Form 15CA and 15CB to repatriate the sale proceeds of a property. The Form 15CB must be signed and submitted by a chartered accountant.
Documents Required for the Transfer of Title of Inherited Property
Nomination: Nomination stands as a foundational document for the transfer of property within a Housing Society or Apartment Association. It establishes the nominee/s as trustees until the transfer is formalized through Probate, Succession Certificate, or changes in property records.
Will: A property Will serves as a pivotal instrument in property transfers. It can be registered or unregistered, typed or handwritten. A Will constitutes the legal declaration of a person's posthumous intentions, revocable only during their lifetime.
Probate: Probate denotes a certified copy of a Will sanctioned by a competent court, granting administration of the testator's estate to the appointed executor. Its necessity arises particularly when the property is situated within the jurisdiction of High Courts of Calcutta, Bombay, or Madras, or in cases of contested wills or deceased beneficiaries.
Succession Certificate: In the absence of a Will, heirs must obtain a succession certificate from the court. Essential documents such as the death certificate of the deceased, birth certificates of heirs, ration card copies, and heirs' bank statements substantiate the rightful ownership of the inherited property.
Original Purchase Deed and Registration Documents: Possession of the original purchase deed and registration documents is imperative. Alternatively, certified copies of the title deed from the relevant registrar's office may suffice for older properties. In Housing Society settings, the Share Certificate is also requisite.
Encumbrance Certificate: An encumbrance certificate is vital for maintaining property transaction records, encompassing sales, leases, mortgages, partitions, gifts, or releases.
Land Related Documents: Document like Khata is mandatory for property transactions, serving as evidence of ownership and possession. It delineates property details, tax obligations, and ownership transfers, distinct from property registration documents. The Khata must be separately transferred to reflect changes in property ownership within municipal records.
Property Management
Managing assets in India while residing abroad can pose logistical challenges, especially for NRIs. The Power of Attorney (PoA) serves as an invaluable instrument for remote management due to its numerous benefits. Notably, even resident Indians find merit in executing PoAs to streamline their property-related responsibilities.
There are distinct types of PoA that cater to different needs:
- Special PoA: This restricts the agent's authority to a specific purpose, ceasing upon the completion of the designated transaction.
- General PoA: This grants broad powers for decision-making without limitations on transactions.
- Durable PoA: This remains effective for a lifetime, even if the principal becomes incapacitated.
NRIs have the authority to execute duly stamped special PoA for the purpose of facilitating the sale of property they own. Conversely, general PoA are typically utilized for the management of day-to-day affairs. However, the execution of property sales by a holder of a general PoA is deemed invalid in light of a significant ruling by the Supreme Court in the case of Suraj Lamp and Industries Pvt. Ltd v State of Haryana1. In this judgment, the court established that sale transactions cannot be conducted through agreements to sell or general PoA. The underlying objective of this ruling is to safeguard the interests of NRIs in their property holdings.
In real estate, a PoA proves beneficial for various actions, including but not limited to:
- Mortgage, exchange, sell, lease, collect rent, grant, borrow.
- Management and settlement of disputes.
- Execution of acts required by financial institutions, insurance companies, and entering into contracts.
In cases involving numerous property owners, executing a PoA for a designated individual simplifies transactions. This empowered individual can act on behalf of all owners collectively, streamlining decision-making processes.
For those settled abroad, PoA execution can be accomplished through the Indian Embassy/Consulate. Two methods exist for this purpose:
- Legalization: Signatures of the notary or judge must be authenticated by the accredited representative of the Indian Embassy/Consulate. Stamping is required within three months of receipt in India.
- Apostilization: Governed by the Hague Convention, this process involves certifying the signature/seal of the document's authenticator. Compliance with Indian laws, including stamp duty payment, is essential.
Stamp Duty Implications for NRIs Inheriting Property
Regarding stamp duty and registration of property acquired through a will, legal practitioners commonly advise that individuals may not be required to pay stamp duty. However, in the event of a dispute regarding the validity of the will necessitating probate, stamp duty may become applicable prior to initiating court proceedings. The amount of stamp duty to be paid in such situation will vary from state to state as per the states specific Stamp Duty Act.
Furthermore, when property is inherited through intestate succession, there is typically no stamp duty obligation whatsoever.
Thus, stamp duty is generally not levied on inherited property, whether acquired through a will or by intestate succession.
Taxation Implications for NRIs Inheriting Property
Double Taxation:
NRIs would also need to look into provisions of the countries they live in, in order to determine tax implications of inherited properties and gain from sale in their country of residence.
Inheritance Tax:
In India, there is no inheritance tax and inheritances are not subject to immediate taxation upon receipt. Instead, taxes are imposed solely on the income generated by the recipient from the inherited assets. For financial assets, this includes interest, dividends, or capital gains arising from the sale of the assets, which are taxed in the hands of the recipient. Similarly, for property, only rental income or capital gains from the sale are taxed in the hands of the recipient.
Long-Term and Short-Term Capital gains:
Tax Implications for NRIs selling property in India entail obligations related to Capital Gains Tax. The tax liability associated with the gain's hinges upon their classification as either short-term or long-term capital gains. A property held for more than 2 years from its acquisition date qualifies as a long-term capital asset, while a property held for 2 years or less is deemed a short-term capital asset.
In cases of inherited property, the period of holding and the cost of acquisition are calculated based on the original owner's date and cost of purchase.
Long-term capital gains (LTCG) are subject to a 20% tax rate, whereas short-term capital gains (STCG) are taxed according to the applicable income tax slab rates for NRIs.
Upon selling a property after 2 years of ownership, the buyer is required to deduct Tax Deducted at Source (TDS) at a rate of 20%. If the property is sold within 2 years, a 30% TDS is applicable.
An asset held for 24 months or less is considered a short-term capital asset, while an asset held for more than 24 months is classified as a long-term capital asset.
Taxation on Gifts of Property for NRIs:
Gifts of immovable property, shares, and securities exceeding Rs 50,000 received by NRIs are taxable as they constitute income received in India, except for gifts from specified relatives or gifts received on marriage.
Tax Benefits for NRIs Selling Property:
NRIs are eligible for exemptions and rebates under various sections of the Income Tax Act, 1961, primarily on their LTCG liability.
Tax Deduction under Section 54 of the Income Tax Act, 1961:
Section 54 of the Income Tax Act, 1961, provides relief from capital gains tax to taxpayers selling residential property if the proceeds are used to purchase another residential property. The entire LTCG liability can be claimed as a refund under this section, provided an equivalent amount is reinvested in another property within a specified timeframe.
Tax Deduction under Section 54EC of the Income Tax Act, 1961:
Under Section 54EC of the Income Tax Act, 1961, NRIs can invest the capital gains from selling a long-term asset in bonds issued by NHAI to avail exemption from capital gains tax, subject to certain conditions.
Tax Deduction under Section 54F of the Income Tax Act, 1961:
Section 54F of the Income Tax Act, 1961, allows NRIs to save taxes on long-term gains from assets other than residential property by investing in residential property in India. The investment must be made within specific timeframes to qualify for deductions.
Footnote
1. (2012) 1 SCC 656
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
