Before moving forward, first, let’s understand the meaning of inherited property. Inherited property means any property that is received by an individual as a result of the death of a family member. The property can be transferred to the individual either through a will or through inheritance laws. Inherited property is taxed only when you sell the inherited property.
Below are a few points that Non-Resident Indians (NRIs) must know while selling their inherited property:
- If there is a will for the inherited property, then the property would be divided as per the will only. Please note that registration of a will is not mandatory but it is always recommended to register the will. It can be done abroad at the local embassy and if the NRI wants to register the will in India, then he/she must physically be present in India.
- If there is no will, then the inherited laws of India will apply. For Hindus inclusive of Buddhists, Jains, and Sikhs the Hindu Succession Act,1956 will apply and for Muslims, Muslim Personals Laws,1937 will apply. Therefore, we can say that the property is divided accordingly as per the respective laws.
- NRIs to ensure that the whole transfer process is managed in a very careful manner as per the laws and need to affirm that the title documentation is appropriately done in their favor, so they can establish a clear title of the property which will become helpful while selling off the same.
- NRIs are permitted to remit up to $1 million per year only under the $1 million scheme by RBI from the sale proceeds of inherited property. If the sale proceeds of the inherited property exceed this limit, then the remittance needs to be sent into the subsequent years.
Now we come to the taxation part. So, whether you are an NRI or an Indian resident, the tax provisions for the sale of inherited property are the same. Long-Term Capital Gain will be taxed when there is a sale of inherited property.
The majority of the inherited properties are in 19’s and therefore you will have to take the fair market value of the property as of 1st April 2001 as your cost. You need to obtain a valuation report for the fair market value of the property as of 1st April 2001 from a registered valuer.
The fair market value cannot be higher than the stamp duty valuation of the property at that date. Such fair market value of the property is to be indexed with the Cost inflation index of the year of sale. The net sale price after deducting expenses incidental to the sale and as reduced by indexed cost is your taxable long-term capital gains on which tax @ 20% (plus surcharge and cess) is payable.
Where the seller is a non-resident for tax purposes, the buyer is mandated to deduct tax at source under Section 195, at a rate of 20% on taxable capital gains, irrespective of the property’s sale value. To facilitate accurate computation of taxable long-term capital gains, sellers must provide relevant documents, including valuation certificates and sale transaction expenses, to the buyer. However, NRIs can request non-deduction of tax at source by seeking a certificate from the jurisdictional income tax officer.
Conclusion: For Non-Resident Indians (NRIs) selling inherited property, adherence to legal and tax regulations is paramount. With insights into division laws, remittance limits, and taxation implications, NRIs can navigate the sales process effectively. Seeking guidance on tax deductions and obtaining necessary documents facilitates compliance, ensuring a seamless transaction.
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