Taxation of Foreign Inheritance or Bequests in India

In India, money received through an inheritance or will is not subject to taxes. Nonetheless, residents (and ordinarily resident) taxpayers are compelled to provide information in the Schedule FA regarding all overseas assets or accounts that they are the beneficial owner, beneficiary, or legal owner of.

If a taxpayer inherits foreign assets, they must report the information in Schedule FA (Foreign Asset) of ITR-2 or ITR-3, depending on which one applies. Section 43 of the Black Money (Undisclosed Foreign Income & Assets) and Imposition of Tax Act 2015 stipulates that failure to provide such information in Schedule FA may result in a penalty of Rs. 10 lakh.

foreign inheritance

Additionally, it would be wise to include the inheritance receipt under the Schedule of Exempt Income (Schedule EI) in the Income Tax Return, if applicable, since it is exempt under section 56(2)(x) in the hands of the Indian receiver.

Taxability of Inherited Amounts in India and Utilizing DTAA for Foreign Tax Credits

In India, the estate tax, often known as inheritance tax, was eliminated in 1985. Consequently, a taxpayer who receives a capital asset or amount of money as a beneficiary under a deceased person’s will will not be subject to tax under the headings “Capital Gains” or “Income from Other Sources.” A transfer of capital assets made pursuant to a will is not considered a “transfer” under Section 47(iii) of the IT Act.

Furthermore, such a transfer made by will or inheritance is expressly exempt from gift tax in the recipient’s possession under section 56(2)(x) of the IT Act. As a result, the domestic taxpayer would not be subject to double taxation in order to be qualified to receive a credit for taxes paid overseas.

Impact on Taxation If You’re a Non-Resident When the Money is Transferred

Only taxpayers who are residents and normally dwell in India would be needed to provide the aforementioned Schedule FA. As a result, non-residents would not have to provide information in Schedule FA of the ITR on foreign assets inherited.

foreign inheritance

Is it advisable to request a transfer to your NRE or NRO account?

According to IT Act Section 10(4)(ii), interest earned on a Non-Resident External Account (NRE) account is free from taxation. On the other hand, tax is due on interest earned on a non-resident ordinary account (NRO). Such an inheritance money may be credited to an NRE or NRO account in accordance with FEMA regulations.

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Nonetheless, it would be wise to put the inheritance amount in an NRE deposit given the tax exemption on interest on NRE accounts and the completely repatriable NRE balance.

To guarantee compliance with the foreign exchange restrictions, you should also consult an expert on the FEMA regulations prior to putting the inheritance amount into the NRE account.