Income tax implications for US citizens inheriting ancestral property in India
Long-term capital gains are taxed at a flat rate of 20% plus cess and surcharge, which is applicable to the proportionate share of profits after deducting the indexed cost from the sale price.
Please clarify the tax liability and necessary form/return for a US citizen to get his share of an ancestral property being sold. My Sister is a US citizen withher share in her father's property inherited through a Will. Please clarify the tax liability, the ITR to be filed, and how the Indian Rupee will be converted to US dollars. Please also guide us through the remittance process and the law under RBI/FEMA, etc.
Answer: There is no tax liability when one inherits any asset. The tax liability arises only when the asset is sold. The share in the profits on the sale of inherited property will be taxed under the head capital gains and taxed as short-term or long-term, depending on the period for which the property was held by the current holders and the previous owner who had paid for it.
The profits will be treated as long-term capital gains if the combined period is over two years. Long-term capital gains are taxed at a flat rate of 20% plus cess and surcharge applicable on the proportionate share of profits after deducting the indexed cost from the sale price.
Your sister can use ITR 2 for this purpose as she will have capital gains and also because she is a non-resident. The Indian rupees will be converted into USD based on the exchange rate on the remittance date. The money can be remitted through banks authorised to deal in foreign currency and authorized dealers. No specific permission is required from RBI for such remittance if the amount of remittance does not exceed 1 million USD in a year. Your sister may have to submit a certificate in form no—15CA to remit the money abroad.
Please get help from a CA to complete obtaining and filing the requisite forms with the income tax department.
Balwant Jain is a tax and investment expert and can be reached at [email protected] and on @jainbalwant on Twitter.