Handling Inheritance in India for an NRI living in the USA
You have lived in the USA for 30 years. You are a tax-paying USA citizen. You have just inherited 3 properties in Mumbai and various financial assets such as bank accounts, mutual funds and stocks. How do you handle it?
First Steps: Wills, Inheritance Certificate, Inheritance Process
Estate duty being abolished in India in 1984, there is no tax in India as regards inheritance of property. Depending on whether a Will is in existence or otherwise, court orders for inheritance certificate or probate must be obtained. The will must be produced as proof or if there is no will, the inheritance will go to the legal heirs according to religion.
The process, including obtaining the inheritance certificate, is described in NRI Inheritance Issues, Part 2.
As for the USA, if a US person receives a gift or inheritance from a non US person (or people) in total of over $100,000 in a given calendar year, an information form needs to be filed with the IRS.
More information regarding this can be found at the following website: www.irs.gov/businesses/article/0,,id=200722,00.html
Otherwise, the US inheritance tax will depend upon the year of the death. In 2010 there was no inheritance tax. In 2011, as the law currently stands, an inheritance up to 1 million dollars will not be taxed. After that amount, the estate will be taxed up to 55% depending on the situation.
Inheriting property in India may involve multiple trips with expenses. Save your receipts as these expenses may be tax deductible under various categories, for example, cost of managing investments, costs of rental property or as a deduction from the estate tax, if due. Ask your accountant for more details.
Inherited Property: To Sell or to Rent?
If you inherit property you must decide what to do with it. You can:
1. Rent out the property
a) Renting the property will provide you with income. You must pay taxes on that income in both the USA and in India where the property is located. With the international tax treaties you don’t have to pay the same tax twice—you will be provided with tax credits in one of the countries. However, you will need to file taxes in both countries as long as income exists.
b) Renting in another country does entail a certain amount of hassle. You may need to find a company to manage your rental or a friend or relative, but neither of these is a guarantee it will go smoothly.
2. Sell the property
a) When you sell a property that has been inherited, you must determine your basis cost for the property to find out how much income from the sale you will declare and pay taxes on for your US tax return. The inheritance laws on basis are in flux currently in the USA, e.g. the rules will change from 2010 to 2011, so be sure to check with your accountant to make sure you declare the correct basis. At this time (2010) the cost basis will be the fair market value of the home, the day of death.
b) Selling the property may not be that simple. You’ll need a reliable and trustworthy real estate agent to help you through the process. This may entail multiple trips to India to get everything in order. Having an excellent agent to help would ease the process. Ask around of your friends and relatives to see if they know someone.
3. Leave the property vacant
a) This is tricky in India. Some people do it but there are risks. People may come to live in your property or on your land, and by doing so, gain rights. You also then have a non-productive asset which is neither earning income nor giving you a capital gain which you can invest. Your property may be appreciating in value, which is good, but it could also get run down if you are not able to maintain it properly.
4. Gift the property to someone, e.g. a relative
Gifting rules in India are as follows:
The Gift Tax has been abolished in India since 1998. However, amounts of gifts exceeding Rs 50,000 received from any person who is not a close relative* of the receiver is to be included in the taxable income of the receiver.
*Close relative – Immediate family members and close blood line of parents and spouse’s parents.
Exclusions to Gift Tax are -
Gift Tax shall not apply to any money/property received –
i) From any close relative*; or
ii) On the occasion of the marriage of the individual; or
iii) Under a will/by way of inheritance; or
iv) From any local authority; or
v) From any Fund/Foundation/University/Educational institution or hospital or other medical institution
or any trust or Institution (referred to in clause (23C) of section10 and section 12AA of Gift Tax Act)
As you can see there are many rules and steps to follow in regards to inheritance. It is recommended that you use an experienced Financial Planner/accountant to aid you with any inheritance you receive abroad. Also, read NRI Inheritance Issues, Part 2, for information on how to obtain a Succession/Inheritance Certificate, moving inheritance to the USA, declaring international bank/investment accounts, etc.
Continued… NRI Inheritance Issues, Part 2
Purchasing power of Rupee
Doubling of Money
Investing in Indian Shares for NRI’s - A Guide
Mental Money and Mental Accounting
Have you heard of Estate Planning? What is it?
Tax on Gifts