Inheritance Tax: What is it? Is it necessary for an NRI to pay this tax?

In matters of inheritance, the landscape can often seem intricate and perplexing. For Non-Resident Indians (NRIs), the questions surrounding inheritance tax in India can add an additional layer of complexity. Let’s delve into the intricacies of inheritance tax, demystify its implications, and explore whether NRIs need to file it.

Tax implication of inheritance for NRIs

Under the provisions of the Foreign Exchange Management Act (FEMA), NRIs can inherit immovable property within India from Indian residents without the need for Reserve Bank of India (RBI) permission. Remarkably, the inheritance of such property does not attract any income tax in the country. Moreover, India does not impose inheritance taxes. This unique aspect of Indian law stands in contrast to jurisdictions where such taxes are levied, granting NRIs a favorable environment for inheriting property without the burden of additional taxes.

Navigating succession laws and taxation

In India, succession laws are governed by personal laws. For instance, in the case of the demise of a Hindu individual, the distribution of assets adheres to the Hindu Succession Act. Importantly, the Income Tax Act of 1961 decrees that inherited assets, whether movable or immovable, are exempt from taxation. This changes if the new owner opts to sell the inherited property. In such cases, taxes may come into play, especially in relation to long-term capital gains.

Crucial factors in inheritance tax

The key lies in comprehending the nuances of taxation on inherited immovable property. While the transfer of inherited property itself does not attract taxation, the sale of such property can trigger tax implications. If the property has been held for more than three years from the date of acquisition, the new owner becomes liable for capital gains tax upon the sale of the asset. 

To mitigate this tax liability, Section 54 of the Income Tax Act provides a strategic avenue. It stipulates that the new owner can seek exemption from capital gains tax if the sale proceeds are reinvested in another property of equal or higher value. Should the acquired property have a lower value, the remaining balance can be deposited into the Capital Gains Account scheme before filing income tax.

Inheritance of movable assets does not incur taxes unless the legal heir, nominee, or joint owner opts to sell them. The absence of immediate taxation offers a favourable window for NRIs inheriting movable assets. However, it is vital to note that taxes, primarily capital gains or income tax, may become relevant if and when the decision to sell is executed.

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