India Abolished Inheritance Tax in 1985
No tax is payable at the time of inheriting any asset — property, shares, cash, gold, or otherwise. Tax arises only when the inherited asset generates income (rent, dividends, interest) or is sold (capital gains). The asset itself passes tax-free from the deceased to the heir.
The NRI and the Indian Asset Nexus
Every year, hundreds of thousands of Indians leave their homeland to build careers and lives in the United States, United Kingdom, Canada, Australia, the Gulf, Singapore, and beyond. They take with them their ambitions — but they leave behind a web of financial connections: property purchased jointly with parents, a share portfolio accumulated over a working lifetime, fixed deposits earning income every quarter, insurance policies, mutual fund SIPs, EPF balances, and eventually, the inheritance of a family home or ancestral land.
The questions these individuals ask are remarkably consistent across geographies:
- Do I have to pay tax in India on rent collected by my brother on my behalf?
- What happens when I sell my late father's flat in Mumbai — does the cost start from what he paid in 1985?
- Can I bring that money to London without restriction?
- Is the dividend from my TCS shares taxable?
- What do I do with the PPF account I opened before I left?
This report answers all such questions comprehensively through fourteen detailed hypothetical case studies spanning every common scenario — inherited residential property, agricultural land, shares and mutual funds, NRO/NRE deposits, EPF and PPF balances, gifts from parents, joint property, and multi-generational succession chains. Each case study traces the full tax and compliance journey from asset acquisition through income generation to ultimate repatriation.
When a capital asset is inherited, the heir's cost of acquisition is deemed to be the cost at which the previous owner (the last person who actually purchased it) acquired it — not the market value on the date of inheritance. The holding period also includes the period for which the previous owner held the asset.
If the original acquisition was before April 1, 2001, the taxpayer may substitute Fair Market Value as on April 1, 2001 (subject to the Stamp Duty value cap). This single provision can make a multi-crore difference to the tax calculation.
Inherited Immovable Property
Residential flats, houses, commercial premises, agricultural land — the largest component of most NRI inheritances
Key facts: Father's purchase cost (2002) = ₹18 lakh. Section 49(1) makes this Rahul's cost. Holding period counted from father's purchase (2002) = 24 years → LONG-TERM.
| Option A — 20% with Indexation (Pre-July 2024 Regime) | |
| Sale Consideration | ₹2,20,00,000 |
| Less: Indexed Cost (CII 2002-03=105; 2024-25=363) = 18L × 363/105 | ₹62,29,000 |
| Long-Term Capital Gain | ₹1,57,71,000 |
| Tax @ 20% with indexation | ₹31,54,000 |
| Option B — 12.5% without Indexation (Post-July 23, 2024 Default) | |
| Capital Gain without indexation (2.2Cr − 18L) | ₹2,02,00,000 |
| Tax @ 12.5% | ₹25,25,000 |
| ✓ Better Option: 12.5% without indexation saves ₹6.3 lakh | ₹25,25,000 |
Tax planning actions: (1) Obtain Lower Deduction Certificate (LDC) under Section 197 before sale — without LDC, buyer deducts TDS at 12.5% on full ₹2.2 crore = ₹27.5 lakh TDS vs actual tax of ₹25.25 lakh. (2) Invest up to ₹50 lakh of LTCG in NHAI/REC bonds within 6 months (Section 54EC). (3) Sale proceeds go to NRO account. (4) File ITR-2 in India by July 31.
DTAA — India-UK: Capital gains from Indian immovable property are taxable in India. Rahul reports the gain on his UK Self-Assessment return and claims Foreign Tax Credit (FTC) for Indian capital gains tax paid.
Section 49(1) traces back to the last person who actually purchased the asset. Priya's grandfather purchased in 1978. Priya's mother's 1995 inheritance was not a purchase. Therefore, Priya's cost = grandfather's 1978 cost of ₹2.5 lakh.
| Option A — 20% with CII Indexation (using FMV April 1, 2001) | |
| FMV as on April 1, 2001 (Registered Valuer certificate required) | ₹18,00,000 |
| Indexed cost (CII 2001-02=100; 2024-25=363): 18L × 363/100 | ₹65,34,000 |
| LTCG (Sale ₹3.5Cr − ₹65.34L) | ₹2,84,66,000 |
| Tax @ 20% | ₹56,93,000 |
| Option B — 12.5% without Indexation | |
| LTCG (₹3.5Cr − ₹18L FMV April 2001) | ₹3,32,00,000 |
| Tax @ 12.5% | ₹41,50,000 |
| ✓ Better Option: 12.5% without indexation saves ₹15.4 lakh | ₹41,50,000 |
Procedural requirements: Registered Valuer's certificate for FMV as on April 1, 2001. Legal heir certificate / succession certificate. Probate (mandatory in Tamil Nadu for testamentary succession on immovable property). Property mutation completed before sale. As an OCI, Priya can own and sell residential/commercial property.
NRIs cannot purchase agricultural land in India. However, they can inherit it — confirmed by multiple High Court rulings. Once inherited, the NRI can sell, but only to a Resident Indian (not to another NRI or foreign entity).
Sale proceeds from inherited agricultural land, farmhouses, and plantation property CANNOT be repatriated outside India by an NRI under the USD 1 million general scheme. Proceeds must remain in India (NRO account). Remittance abroad requires prior RBI approval.
| Sale Price | ₹1,20,00,000 |
| FMV as on April 1, 2001 (acquisition cost substitute) | ₹12,00,000 |
| Option A: Indexed cost (12L × 363/100) → Tax @ 20% | ₹15,28,800 |
| Option B: 12.5% without indexation on ₹1,08,00,000 | ₹13,50,000 |
| Add: Health & Education Cess @ 4% | ₹54,000 |
| ✓ Total Tax (12.5% option preferred) | ₹14,04,000 |
Vikram's options for the NRO proceeds: (a) Reinvest in residential property (Section 54F — can eliminate LTCG tax entirely), (b) ₹50 lakh in capital gain bonds (Section 54EC), (c) NRO FDs/mutual funds generating income in India, (d) Gift to resident Indian relatives (gifts to lineal relatives are tax-free).
Rental Income from Inherited and Owned Property
Taxable in India under Section 22 — with specific TDS obligations on tenants
| Item | Treatment |
|---|---|
| Gross Annual Value | Higher of standard rent or actual rent received |
| Less: Municipal taxes paid | Deductible in full |
| Less: Standard Deduction (Section 24a) | 30% of Net Annual Value — flat, no bills needed |
| Less: Interest on housing loan (Section 24b) | Fully deductible — no ₹2 lakh cap for let-out property |
| TDS obligation on tenant | 30% TDS u/s 195 — no monthly threshold for NRI landlords |
From FY 2024-25 onwards, an individual can declare a maximum of TWO properties as self-occupied (NIL annual value). All other properties — even if genuinely vacant — are deemed let-out at market rent and taxable.
| Ananya's Share — 50% Co-Ownership (Annual) | |
| Residential flat rent (₹35K × 12 × 50%) | ₹2,10,000 |
| Less: Municipal taxes (50% share) | ₹6,000 |
| Less: 30% standard deduction (Section 24a) | ₹61,200 |
| Taxable from residential flat | ₹1,42,800 |
| Commercial shop rent (₹55K × 12 × 50%) | ₹3,30,000 |
| Less: Municipal taxes + 30% standard deduction | ₹1,05,300 |
| Taxable from commercial shop | ₹2,24,700 |
| Total Taxable Rental Income (Ananya) | ₹3,67,500 |
| Self-occupied flat — declared as self-occupied | Annual Value = Nil |
TDS compliance: Tenants must deduct TDS at 30% on rent paid to NRI landlords (Section 195) from the first rupee — unlike the ₹50,000/month threshold for resident landlords. Tenant deposits TDS using Form 26Q and issues Form 16A. If TDS is not deducted, the tenant becomes an 'assessee in default' personally liable for the tax plus interest.
Sameer can declare only ONE of the two flats as self-occupied (zero Annual Value). The second flat, even if genuinely vacant and never let out, is treated as DEEMED LET OUT. Its Annual Value = prevailing market rent — and rental income on that notional basis becomes taxable, regardless of whether he received a single rupee of rent.
An NRI with multiple inherited vacant properties can find himself paying income tax on rent he never collected. The only relief: the 30% standard deduction under Section 24(a) still applies to this notional income.
Inherited Shares, Mutual Funds & Demat Assets
Section 49(1) applies equally to securities — the previous owner's cost and holding period transfer to the heir
Cost of inherited shares = father's original purchase cost. Holding period includes the father's holding period under Section 2(42A). Since the father held all stocks > 12 months, ALL gains are LTCG at 12.5% with ₹1.25 lakh annual exemption (Section 112A).
| Infosys: Sale (1000 × ₹1,900) − Cost (1000 × ₹150) | ₹17,50,000 |
| HDFC Bank: Sale (500 × ₹1,600) − Cost (500 × ₹400) | ₹6,00,000 |
| Reliance: Sale (2000 × ₹2,900) − Cost (2000 × ₹200) | ₹54,00,000 |
| Total LTCG | ₹77,50,000 |
| Less: Annual LTCG exemption (Section 112A) | ₹1,25,000 |
| Taxable LTCG | ₹76,25,000 |
| Tax @ 12.5% | ₹9,53,125 |
| Add: Health & Education Cess @ 4% | ₹38,125 |
| Total Tax Liability | ₹9,91,250 |
Procedural steps: (1) Shares transmitted to Arun's demat account via legal heir certificate + death certificate + transmission request form to DP. (2) Open PIS sub-account under NRE or NRO account — NRIs must route all share trades through PIS. (3) TDS at 12.5% deducted by broker. (4) File ITR-2 to claim ₹1.25 lakh exemption and any TDS refund.
Dividend income: Dividends are taxable at slab rate; TDS deducted at 20% by company. Under India-UAE DTAA, no UAE tax — Arun pays Indian tax with no double taxation concern.
| Fund | Lock-in / Holding | Tax Treatment | TDS |
|---|---|---|---|
| ELSS Fund (SIP 2015-2020) | Lock-in runs from previous owner's purchase date — already over. All units LTCG. | 12.5% LTCG (Section 112A) | 12.5% |
| Debt Fund (post-April 2023) | No LTCG benefit — rule change effective April 2023 | Slab rate — always STCG regardless of holding period | 30% |
| Balanced Advantage Fund (>65% equity) | Classified as equity-oriented | 12.5% LTCG applies | 12.5% |
With effect from April 1, 2023, debt mutual funds lost their LTCG benefit. Regardless of holding period, all gains are taxed at the applicable income tax slab rate. TDS on debt MF redemption for NRIs is 30%. This makes debt MFs significantly less tax-efficient for NRIs compared to NRE/FCNR fixed deposits which earn completely tax-free interest.
Gifts, Transfers & Inter-Family Transactions
Section 56(2)(x) — gifts from relatives are completely tax-free regardless of amount
Any sum or property received without adequate consideration becomes taxable if it exceeds ₹50,000. EXCEPTIONS: Gifts from relatives are completely tax-free regardless of amount. 'Relative' includes spouse, siblings, siblings of spouse and parents, and all lineal ascendants/descendants and their spouses.
Gifts received on occasion of marriage, under a Will, or by way of inheritance are also exempt regardless of relationship.
| Party | Tax at Time of Gift | Reason |
|---|---|---|
| Kartik (recipient) | Tax-FREE | Gift from parent = relative under Section 56(2)(x) — exempt regardless of value |
| Father (donor) | Tax-FREE | Section 47(iii) specifically exempts gifts from capital gains tax at time of transfer |
| Kartik's future sale | Section 49(1) applies | Cost = father's original cost of ₹5 lakh (or FMV April 1, 2001 if lower); holding period from father's 1995 purchase |
While the Income Tax Act is generous on gifts between relatives, FEMA has its own restrictions. An NRI can receive a gift of immovable property from a resident — but cannot hold agricultural land, farmhouses, or plantation property received by gift (as opposed to inheritance). Upon receiving such a gift, the NRI must either: (a) sell it to a resident Indian within a reasonable time, or (b) seek specific RBI approval to retain it.
| Party / Issue | Tax Position |
|---|---|
| Suresh — outward remittance | Not taxable in India. No 'gift tax' on NRI outward remittances. |
| Parents — gift received from son | Tax-FREE. Son is a lineal descendant = relative under Section 56(2)(x). |
| Income earned by parents on invested gifted money | Taxable in parents' hands (NOT clubbed back to Suresh) |
| Clubbing provisions (Section 64) | Clubbing applies to transfers to spouse and minor children ONLY — NOT parents |
US compliance note: Suresh must file FBAR (FinCEN 114) to disclose any foreign bank accounts over USD 10,000 — including any joint accounts or accounts over which he has signatory authority in India.
PPF, EPF & Small Savings Instruments
Accumulated balances from pre-emigration years — specific rules apply to NRIs
| Issue | Position for NRIs |
|---|---|
| Can NRI extend PPF beyond 15 years? | NO — NRIs cannot extend in 5-year blocks (unlike resident Indians) |
| Interest after maturity (from Oct 2024) | Only POSA rate (~4% p.a.) — down from 7.1% PPF rate. Effective penalty for not closing. |
| Tax on maturity proceeds (Section 10(11)) | Completely TAX-FREE in India — entire ₹32 lakh is exempt |
| Qatar tax position | Qatar has no personal income tax — no issue |
NRIs with PPF accounts must close at maturity. The 2024 notification makes continued holding financially detrimental — 4% rate vs 7-8% tax-free NRE FD rate. Close PPF at maturity → transfer to NRO account → shift to NRE FD for ongoing tax-free returns.
| Condition | Tax Treatment |
|---|---|
| Continuous service ≥ 5 years (Anita: 8 years ✓) | EPF withdrawal completely TAX-FREE (Section 10(12)). No TDS if PAN provided. |
| Withdrawal before 5 years, amount > ₹50,000 | TDS at 10% (with PAN) or 34.608% (without PAN) |
Anita must update her UAN portal with overseas address and banking details. Transfer EPF proceeds to NRO account and then repatriate. In the Netherlands, this lump sum may be taxable — Article on lump sum pension/provident fund receipts in the India-Netherlands DTAA should be checked with a Dutch tax advisor.
Dividends, Interest & Investment Income
Post-DDT regime (from April 2020) — dividends taxable in shareholder's hands; TDS applies from first rupee
From April 2020, dividends are taxable in the shareholder's hands at their applicable income tax slab rate. For NRIs, TDS is deducted at 20% on all dividends — no minimum threshold (unlike ₹5,000 for residents).
| Total dividend income (FY 2025-26) | ₹6,00,000 |
| TDS deducted by companies @ 20% | ₹1,20,000 |
| Tax on ₹6L at slab (Nil up to ₹2.5L + 5% on next ₹2.5L + 20% on ₹1L) | ₹32,500 |
| Add: Cess @ 4% | ₹1,300 |
| Total Tax Liability | ₹33,800 |
| TDS already deducted | ₹1,20,000 |
| REFUND due — file ITR-2 to claim | ₹86,200 |
DTAA Planning: Submit Form 10F + Japan Tax Residency Certificate to each company's registrar before the dividend record date. Under India-Japan DTAA (Article 10), TDS may be reduced to 10-15% instead of 20% — reducing upfront TDS and the refund wait.
| Annual NRO FD interest income | ₹11,25,000 |
| TDS without DTAA (30% + cess) | ₹3,51,000 |
| TDS with India-USA DTAA Article 11 (15% + cess) | ₹1,75,500 |
| Annual TDS saving from DTAA claim | ₹1,75,500 |
| Over 5 years (compounded with reinvestment) | ~₹9-10 lakh |
Procedure: Obtain IRS Form 6166 (Tax Residency Certificate) → File Form 10F with each bank → Bank deducts TDS at 15% instead of 30%.
US tax treatment: Report all NRO FD interest on US federal return (Form 1040, Schedule B). Claim Foreign Tax Credit on Form 1116 for the 15% Indian TDS paid. Mohan must also file FBAR (FinCEN 114) to disclose foreign bank accounts over USD 10,000, and potentially Form 8938 (FATCA) if aggregate foreign assets exceed the threshold.
Complex Scenarios: Joint Property with Resident Co-Owner
One of the most practically complex NRI property tax situations — bifurcated TDS obligations
The buyer must deduct TDS differently for each co-owner: For Raj (resident): TDS under Section 194IA = 1% of ₹1.4 crore = ₹1.4 lakh. For Arvind (NRI): TDS under Section 195 = 12.5% on LTCG (or on full amount without LDC). In practice, many buyers deduct 12.5% on the entire ₹2.8 crore, causing massive over-deduction for the resident co-owner. Both co-owners should proactively obtain Lower Deduction Certificates.
| Arvind's Share — NRI Co-Owner Calculation | |
| Arvind's 50% sale consideration | ₹1,40,00,000 |
| Less: 50% of indexed cost (50% × ₹8L, indexed) | ₹14,58,000 |
| LTCG (12.5% without indexation preferred) | ₹1,35,42,000 |
| Tax @ 12.5% | ₹16,92,750 |
| Add: Cess @ 4% | ₹67,710 |
| Total Indian Tax | ₹17,60,460 |
| TDS buyer deducts (on Arvind's LTCG @ 12.5%) | ₹17,93,400 |
| Net proceeds to Arvind (NRO account, after TDS) | ₹1,22,06,600 |
Repatriation to Singapore: Arvind's share ≈ USD 1.46 million — exceeds the USD 1 million annual limit. May need repatriation in two tranches across two financial years. Form 15CA (Part D) + Form 15CB from a CA mandatory before each remittance. Singapore does not tax capital gains — no double taxation arises.
All 14 Case Studies at a Glance
Complete reference table — Scenario · Asset · Key Rule · Tax Rate · Repatriation
| # | NRI / Location | Asset Type | Key Rule | Tax Rate | Repatriation |
|---|---|---|---|---|---|
| 1 | Rahul (UK) | Residential property sale | Section 49(1): father's cost; Section 112 | 12.5% LTCG | USD 1M/yr — NRO + 15CA/CB |
| 2 | Priya (Australia) | Multi-gen succession | FMV April 1, 2001 if pre-2001; trace to last purchaser | 12.5% LTCG | USD 1M/yr — NRO |
| 3 | Vikram (USA) | Agricultural land | Can inherit; sell only to resident Indian | 12.5% LTCG | CANNOT repatriate — RBI approval needed |
| 4 | Ananya & Deepa (Singapore) | Residential + commercial rental | 30% TDS on tenants; max 2 self-occupied properties | Slab rate | Via NRO — USD 1M/yr |
| 5 | Sameer (Canada) | Vacant inherited flats | Deemed let-out: notional rent taxable on 2nd+ property | Slab on notional rent | N/A |
| 6 | Arun (UAE) | Inherited share portfolio | Section 49(1); PIS route; holding period includes father's | 12.5% LTCG above ₹1.25L | NRE PIS: unlimited; NRO: USD 1M/yr |
| 7 | Neha (Germany) | ELSS, Debt, Hybrid MF | Post-2023 debt funds: slab rate — no LTCG; lock-in from previous owner | 12.5% equity; slab for debt | NRO → 15CA/CB |
| 8 | Kartik (New Zealand) | Plot gifted by father | Section 47(iii): gift not taxable; Sec 49(1) for future sale | Future sale: 12.5% LTCG | Check: agri land — may not be repatriable |
| 9 | Suresh (USA) | Cash remittances to parents | Section 56(2)(x): gift from son — tax-free for parents | No tax on gift | FBAR required in USA |
| 10 | Rajesh (Qatar) | PPF account maturity | Cannot extend; 4% rate post-maturity; Section 10(11) exempts | TAX-FREE maturity | NRO → NRE transfer |
| 11 | Anita (Netherlands) | EPF withdrawal | 5+ years service = tax-free; Section 10(12) | TAX-FREE (8 yrs service) | NRO → repatriate |
| 12 | Ritu (Japan) | Inherited dividend portfolio | 20% TDS on dividends; DTAA reduces to 10-15% | Slab rate (DTAA benefit) | N/A (income) |
| 13 | Mohan (USA) | NRO Fixed Deposits | Form 10F + IRS TRC reduces TDS 30% → 15%; saves ₹1.75L/yr | 15% (India-USA DTAA) | USD 1M/yr |
| 14 | Arvind + Raj (Singapore) | Joint inherited property | Bifurcated TDS: 1% (resident) vs 12.5% (NRI); LDC essential | 12.5% LTCG (Arvind's share) | 2 tranches × USD 1M over 2 years |
NRI Income from Indian Assets — 5-Step Checklist
From acquiring NRI status to annual compliance — the complete sequence
- Convert resident savings account to NRO account — failing to do so is a FEMA violation
- Close or maintain PPF only until maturity — NRIs cannot open new PPF accounts
- Register for PIS (Portfolio Investment Scheme) with a designated bank before trading Indian equities
- Update address with all mutual fund folios, DPs, and insurance companies
- Link PAN with Aadhaar if PAN was issued in India
- Obtain legal heir certificate / succession certificate / probate as applicable (state-specific requirements vary)
- Register property mutation in your name at the local sub-registrar
- Get shares/MF units transmitted via depository participant with death certificate and transmission form
- Obtain Registered Valuer certificate for FMV as on April 1, 2001 for any pre-2001 assets
- Do NOT treat inheritance value as cost — it is the previous owner's cost under Section 49(1)
- Apply for Lower Deduction Certificate (Form 13) at least 2–3 months before sale — especially for property where buyer TDS at 12.5% on full value substantially exceeds actual tax
- Compute capital gains carefully: correct cost (Section 49(1)), correct holding period (includes previous owner), correct indexation option (FY of original purchase)
- File Form 10F + TRC with payer for DTAA benefits before payment
- Evaluate Section 54/54EC/54F reinvestment options to reduce or eliminate LTCG tax
- All sale proceeds / rental income must first come into the NRO account
- For outward remittances: Form 15CA (self-declaration) + Form 15CB (CA certificate) mandatory for amounts exceeding ₹5 lakh
- Annual limit: USD 1 million per financial year
- Agricultural land / farmhouse sale proceeds: CANNOT be repatriated — requires prior RBI approval
- Maintain records for 7 years for potential Income Tax scrutiny
- File ITR-2 (or ITR-3 if business income) in India if total Indian income exceeds ₹2.5 lakh, or if any capital gain regardless of amount. Deadline: July 31.
- Report foreign assets in Schedule FA of the ITR
- File FBAR (FinCEN 114) for USA-based NRIs with foreign accounts over USD 10,000; Form 8938 (FATCA) if assets exceed threshold
- Check Form 26AS / Annual Information Statement (AIS) online for TDS credit and advance notices
- Renew Lower Deduction Certificate annually — valid for one financial year only