Step-by-Step Guide to NRI Tax Benefits in India

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. They are called ‘movable’ because they can be physically moved from one place to another with ease. Immovable assets include land, houses, and real estate. They are called ‘immovable’ because they cannot be moved from one place to another. Let’s break down the inheritance regulations:

Movable Assets Inheritance:
- Movable assets are subject to the personal laws of the deceased.
- The inheritance of movable assets is governed by the Indian Succession Act, 1925, which applies to people of all religions, except Hindus, Sikhs, Jains, and Buddhists.
- For Hindus, Sikhs, Jains, and Buddhists, the Hindu Succession Act, 1956, applies.
- If a person dies intestate (without a will), the movable assets are distributed among legal heirs according to the personal laws applicable to the deceased.
Immovable Assets Inheritance:
- Immovable assets are subject to the law of the country in which they are located.
- The inheritance of immovable assets is governed by the Indian Succession Act, 1925, and the Hindu Succession Act, 1956.
- Inheritance laws for immovable assets may vary depending on the religion of the deceased and the state in which the property is located.
- If a person dies intestate, the immovable assets are distributed among legal heirs according to the personal laws applicable to the deceased.

In India, Non-Resident Indians (NRIs) are subject to the country’s succession laws concerning the inheritance of property situated within Indian territory. It’s crucial to distinguish between movable and immovable assets, as their inheritance regulations vary. Movable assets, such as bank accounts, stocks, and jewelry, are subject to Indian succession laws 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. Immovable assets include land, houses, and real estate. 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 term “NRI” is not explicitly defined in any act or legislation. However, by the definition of the term “Person resident in India” as defined in two Acts, namely the Income Tax Act, 1961, and the Foreign Exchange Management Act, 1999 (“FEMA”), we can understand that: An NRI is an Indian Citizen who, under the law, has not resided in India for more than 182 days during the previous financial year, or who has left India or resides outside India in another country with the intention to be employed in that country, or who has left India or resides outside India in another country to conduct his/her business or employment in that country, or who has left India or resides outside India in another country with an intention indicating his/her objective to stay outside India for an undetermined period of time.

Different kinds of properties that can be inherited by NRIs in India:

Non-Resident Indians (NRIs), like other Indian citizens, have the legal right to inherit various types of immovable property in India, including 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 are not permitted to purchase agricultural land. However, they are free to inherit agricultural land. Consequently, NRIs can only sell the inherited agricultural land to a resident Indian. Notably, NRIs have the legitimate right to inherit agricultural lands and farmhouses, a privilege usually restricted for acquisition under Indian property transfer laws. This inheritance extends to properties bequeathed by family members and relatives. However, inheriting property from another NRI is subject to specific regulations. In cases 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 property was acquired without obtaining the requisite permission from the RBI when mandated, the NRI cannot inherit the property without prior approval from the RBI.

Repatriation of Sale Proceeds of Immovable Property in India

If an individual residing outside India acquires immovable property located in India through the following methods, they cannot repatriate the sale proceeds from such property without prior permission from the Reserve Bank of India (RBI):

If the property is acquired through inheritance.
If the property was acquired while the individual was a resident of India.

However, repatriation up to USD 1,000,000 (One Million US Dollars only) is allowed for a Non-Resident Indian (NRI) if the property is acquired through the following means:

Immovable property situated in India acquired from a resident of India through inheritance.
From an individual who has retired from employment in India.
From an individual who has inherited immovable property from a spouse who is a resident in India.

RBI approval is required if the remittance exceeds USD 1,000,000 (One Million US Dollars only) per financial year. If the sale proceeds of immovable property are to be repatriated, then it is subject to the following conditions:

The immovable property should be acquired in accordance with the provisions of the Foreign Exchange Management Act (FEMA).
The amount paid for acquisition should be through any of the permissible modes of payment.
If the immovable property is a residential property, an NRI can repatriate the sale proceeds of two properties.

Therefore, the NRI must submit Form 15CA and 15CB to repatriate the sale proceeds of a property. Form 15CB must be signed and submitted by a chartered accountant.

Documents Needed to Transfer Inherited Property Ownership

Nomination: Nomination is a crucial document needed to transfer property in a Housing Society or Apartment Association. It essentially establishes the nominee/s as trustees until the transfer is formalized through Probate, Succession Certificate, or changes in property records. Will: A property Will is a very important document for property transfers. It can be registered or unregistered, typed or handwritten. A Will is the legal declaration of a person’s wishes after they pass away, which can’t be changed during their lifetime. Probate: Probate is a certified copy of a Will issued by a court, granting administration of the deceased’s estate to the appointed executor. It’s required particularly when the property is within the jurisdiction of High Courts of Calcutta, Bombay, or Madras, or in cases of contested wills or deceased beneficiaries. Succession Certificate: If there is no Will, heirs must get 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 prove rightful ownership of the inherited property. Original Purchase Deed and Registration Documents: Having the original purchase deed and registration documents is crucial. 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 necessary. Encumbrance Certificate: An encumbrance certificate is essential for maintaining property transaction records, which includes sales, leases, mortgages, partitions, gifts, or releases. Land Related Documents: Documents like Khata are essential for property transactions. It serves as evidence of ownership and possession. It outlines property details, tax obligations, and ownership transfers, different from property registration documents. The Khata must be separately transferred to reflect changes in property ownership within municipal records. Managing property in India while living abroad can be tricky, especially for non-resident Indians (NRIs). A Power of Attorney (PoA) is a really useful tool for remote management because it has a lot of benefits. Even Indians living in India find it helpful to use PoAs to make property-related tasks easier.

There are different types of PoAs for different needs:

Special PoA: This limits the agent’s authority to a specific purpose, which ends when that purpose is fulfilled.
General PoA: This gives broad powers for decision-making without any limits on transactions.
Durable PoA: This stays effective for a lifetime, even if the person who gave the power becomes unable to make decisions.

NRIs can use a special PoA with proper stamping to help sell the property they own. Usually, a general PoA is used for managing day-to-day affairs. However, the Supreme Court ruled in the Suraj Lamp and Industries Pvt. Ltd v State of Haryana1 case that using a general PoA for property sales is not valid. This ruling aims to protect the interests of NRIs in their property. In real estate, a PoA is useful for many things, such as:

Mortgage, exchange, sale, lease, rent collection, granting, and borrowing.
Managing and resolving disputes.
Doing things required by banks, insurance companies, and making contracts.

When multiple people own a property, giving PoA to one person simplifies things. This person can act on behalf of all owners, making decision-making easier. For those living abroad, PoA can be done through the Indian Embassy/Consulate. There are two ways to do this:

Legalization: Signatures from a notary or judge must be authenticated by the Indian Embassy/Consulate. Stamping must be done within three months of receiving the document in India.
Apostilization: Governed by the Hague Convention, this process certifies 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: Legal professionals often suggest that individuals may not need to pay stamp duty for property acquired through a will. However, if a dispute arises regarding the will’s validity, requiring probate, stamp duty may become applicable before court proceedings commence. The amount of stamp duty to be paid in such a situation will vary from state to state according to the specific Stamp Duty Act of each state. Moreover, in the case of property inherited through intestate succession, there is typically no stamp duty obligation. Hence, stamp duty is generally not imposed on inherited property, whether acquired through a will or by intestate succession.

Tax Implications for NRIs Inheriting Property

Double Taxation: NRIs also need to check the rules of the countries they live in to find out about the tax they have to pay on inherited properties and the profit they make from selling them in their country of residence. Inheritance Tax: In India, there’s no inheritance tax, and you won’t have to pay taxes right away when you receive an inheritance. Instead, you only pay taxes on the income you earn from the inherited assets. For things like money in the bank or stocks, this includes things like interest, dividends, or profit from selling them. And for property, you only pay tax on the rental income or profit from selling the property. Long-Term and Short-Term Capital gains: When NRIs sell property in India, they have to pay Capital Gains Tax. The tax you owe depends on whether the property was held for a short or long term. If you held the property for more than 2 years, it’s a long-term asset. If you held it for 2 years or less, it’s a short-term asset. In the case of inherited property, the time it was held and the cost are based on the original owner’s date and cost of purchase. Long-term capital gains (LTCG) are taxed at a rate of 20%, whereas short-term capital gains (STCG) are taxed according to the applicable income tax slab rates for NRIs. When you sell a property after owning it for 2 years, the buyer has to take out 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 Property Gifts for NRIs: Gifts of immovable property, shares, and securities exceeding Rs 50,000 received by NRIs are subject to taxation as they are considered income received in India, except for gifts from specified relatives or gifts received due to marriage. Taxation on Inherited rental property for NRIs: If the inherited property generates rental income, income will be taxed as per Indian Tax Laws Tax Benefits for NRIs Selling Property: NRIs are entitled to exemptions and rebates under various sections of the Income Tax Act, 1961, primarily concerning their Long-Term Capital Gains (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 utilized 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.

Laws Regarding to Inheritance Tax & Tax Benefits for NRIs in India