A guide to inheritance tax in India

15.05.17
7 minute read
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If you have property - or even relatives or friends - in India, you may be concerned about inheritance laws. How do you accept an Indian inheritance? And what taxes will you have to pay? Can you even inherit property in India if you’re a foreigner?

Read on for the answer to these and other questions about Indian succession rules.

How Does Succession In India Work?

You can receive an Indian inheritance in one of two ways:

  1. You are named in someone’s will (testate succession);
  2. The law says so (intestate succession).

Testate Succession

In India, you can leave your property to whoever you want, simply by naming them as an heir in your will. Similarly, anyone can inherit Indian property.

There are three main exceptions to this rule:

  1. Sharia (Muslim) Law
  2. The Foreign Exchange Management Act
  3. Disqualified nationalities

Shariah Law

There are two main restrictions on who can inherit under Sharia Law.

Firstly, you have to leave a specific share of your estate to the legal line of succession (more on this later). This part of your estate is called the reserved portion. Secondly, certain people cannot inherit, even if you name them in your will.

These include:

  1. Non-Muslims
  2. Murderers
  3. Unborn children
  4. Children born out of marriage
  5. Step-parents

Foreign Exchange Management Act

This law applies to Indian citizens who aren’t resident in India. In simple terms, if the deceased is a non-resident Indian citizen, or a person of Indian origin who is neither a resident nor a citizen, you’ll only be able to inherit Indian property if you’re an Indian citizen or a resident.

Disqualified Nationalities

Citizens of the following countries cannot inherit (or purchase) immovable property in India, unless they get permission from the Reserve Bank of India:

  • Pakistan
  • Bangladesh
  • Sri Lanka
  • Afghanistan
  • China
  • Iran
  • Nepal
  • Bhutan

Intestate Succession

If a person dies without leaving a will, things can get a bit more complicated. While many countries have one universal law of succession, India has several different laws. Which law applies will depend on the deceased’s religious beliefs. The main laws are the following:

  1. Hindu Succession Act
  2. Sharia Law
  3. Intestate Succession Act

Let’s have a look at each of them.

Hindu Succession Act

This law applies to Hindus, Buddhists, Sikhs and Jains. Different rules apply depending on whether the deceased is a man or a woman.

Males

There are four classes of people who can inherit a man’s property. Class one heirs have first preference, then class two and so on. People in a class can only inherit if no one in the preceding class accepts the inheritance.

Class one heirs are the deceased’s immediate relatives: his wife, children, grandchildren, siblings and mother. If the deceased’s children are dead, their spouses will form part of class one. Class two heirs include the deceased’s father, grandparents, uncles, aunts, nephews and nieces. Class three heirs are called agnates: the deceased’s relatives from the male line. This is limited to blood relatives. Finally, class four heirs are cognates: the deceased’s blood relatives from the female line.

Females

The four classes of heirs are slightly different when the deceased is a female:

  • Class one - her husband and children
  • Class two - the husband’s heirs
  • Class three - her parents
  • Class four - her mother’s heirs

However, for property the deceased inherited from her parents, class two heirs are her father’s heirs.

Sharia Law

This law applies to Muslims. Under Sharia Law, you can only divide up to one third of your estate as you wish. Whether succession is testate or intestate, these nine relatives inherit two thirds (the reserved portion): sons, daughters, wives, father, mother, brothers, sisters, grandsons and granddaughters.

Each relative is due a fixed share. This is worked out according to the section of the Quran called Surat An-Nisa. Anything left over goes to other relatives. Agnates (blood relatives from the male line) have first preference.

Intestate Succession Act

This law applies to Parsis, Christians, mixed-religion couples and others. The deceased’s spouse takes one third of the inheritance, or all of it if there are no children and no living relatives. The remaining two thirds are divided as follows:

  1. children (children born outside of marriage are excluded);
  2. surviving relatives, in the following order of preference:
    • Father
    • Equally between mother, brothers and sisters (or nieces and nephews if brothers and sisters are dead)
    • Mother (if there are no brothers, sisters, nieces or nephews)
    • Closest living relatives

How Do I Accept An Inheritance In India?

Before you accept an inheritance, you’ll need to check whether the deceased had any debts. These must be paid off in full before you can take your share. Once that’s done, the estate is divided either as set out in the will, or according to the applicable law of intestate succession.

Transferring Title To Immovable Property

If you inherit land, a house or an apartment, you’ll need to formally transfer title. In order to do this, you’ll need the following documents:

  1. A registered will or, if succession is intestate, a succession certificate issued by the court;
  2. The property’s encumbrance certificate; and
  3. The property’s khata.

You’ll need to take these documents to the local municipality and apply for mutation, the procedure which changes the records to show that you’re now the owner. You can either do this yourself or appoint a representative to do it for you via a power of attorney.

Unfortunately, this process can be quite complicated and time-consuming, especially if your documents aren’t readily available. If you own property in India, it’s a good idea to keep your documents together in a safe place, as this will save your heirs a lot of problems and frustration.

What Are The Tax Rates And Allowances?

India doesn’t have inheritance tax. However, you may need to pay income tax, capital gains tax and wealth tax on your inheritance.

If you inherited an immovable property, you’ll also need to pay property taxes. These vary from state to state and even from municipality to municipality, so you’ll have to check the exact figure with the local authorities.

Income Tax

If your inheritance generates income (rent, for example), you’ll need to include it in your annual tax return. Income tax is payable at different rates, depending on your level of income and whether you’re a resident or non-resident.

Resident Income Tax

The resident income tax rates for 2016 are:

Income (INR) Rate (%)
up to 250,000 0
250,001 - 500,000 10
500,001 - 1M 20
1M and up 30

Source: incometaxindia.gov.in as of 25/05/16

The tax free bracket is INR 300,000 for people over 60 and INR 500,000 for people over 80.

Non-Resident Income Tax

The tax rates for non-residents in 2016 are:

Income (INR) Rate (%)
up to 250,000 0
250,001 - 500,000 10
500,001 - 1M 20 + INR 25,000 fee
1M and up 30 + INR 125,000 fee

Source: http://www.incometaxindia.gov.in as of 25/05/16

If your income exceeds INR 10,000,000, you’ll also have to pay a surcharge. This is 10% of the tax due.

Capital Gains Tax

If you sell an immovable property you inherited, you’ll have to pay capital gains tax on your net profit. This is calculated by subtracting the cost of the property (the price paid by the person who left you the property) and any expenses from the sales price.

The rate of tax due will depend on how long the deceased had the property before you sold it.

If the deceased had the property for less than three years, capital gains tax is payable at the same rates as income tax. If the deceased had the property for more than three years, however, the rate is 20%.

Wealth Tax

You may be liable to pay 1% wealth tax if the value of certain assets exceeds INR 3,000,000.

Assets liable to wealth tax include jewellery, property (unless it’s rented out for at least 300 days a year), cash in excess of INR 50,000, cars, boats and aircraft.

What Happens If I Transfer My Inheritance Money Abroad?

If you transfer your inheritance out of India, you might have to pay inheritance tax and other taxes in the country where you live. Different countries will have different rules, so it’s important to check these out, as you might end up having to pay expensive fines or even incur criminal liability.

India also has rules on transferring Indian income out of the country (this is called repatriation of funds).

Repatriation Of Indian Funds

If you’re a non-resident, you must deposit any income you make in India (including inheritance money) in a Non-Resident Ordinary Account.

This type of account doesn’t allow funds to be freely transferred out of the country. You’ll need to ask your bank to do this for you. You’ll also need the following documents:

  1. Two copies of a Certificate of Information, also called Form 15CB, completed and signed by a chartered accountant;
  2. Form 15CA (you’ll need information from Form 15CB to complete this);
  3. Form A2 (your bank should give you a copy of this); and
  4. Application for foreign exchange (your bank should also give you a copy of this).

You can transfer up to US$1 million per financial year after taxes. The financial year runs from April to March.

Transferring Inheritance Money To The UK

The UK is currently the only country with whom India has an agreement (treaty) specifically on inheritance tax.

According to this treaty, whether you’ll need to pay UK inheritance tax will depend on where the deceased was domiciled at the time of death. In the simplest of terms, your domicile is the country you think of as your permanent home.

You only have to pay UK inheritance tax if the deceased was domiciled in the UK at the time of death. This is currently set at 40%, but there are various exemptions and deductions you can make.

Transferring Inheritance Money To The US

You only have to pay US inheritance tax if the deceased was a US resident, citizen or green card holder. However, you’ll still have to report your inheritance to the IRS by filing Form 3520 along with your annual tax return.

Any income from your inheritance will be taxed in the US according to US rules. This includes interest, dividends and capital gains. You can claim a foreign tax credit for any amounts you’ve already paid in India.

Transferring Inheritance Money To Australia

Australia doesn’t have inheritance tax. However, you’ll still need to report your inheritance to the tax authorities. In Australia, you have to declare any foreign assets greater than AUD $50,000 on your tax return every year. In addition, as a resident, you’re taxed on your worldwide income. Any income your Indian inheritance generates will count towards your Australian income tax liability.

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