Are Foreign Assets Inherited by an Indian Resident Taxable?

When an Indian resident inherits foreign assets, such as bank accounts, real estate, or shares from abroad, the tax treatment of these assets depends on the Indian tax laws and the tax residency status of the person inheriting them. Though India does not impose inheritance tax, foreign assets inherited by Indian residents may be subject to capital gains tax when sold or transferred, depending on the nature of the asset and applicable double taxation treaties (DTTs).

Tax Implications of Inheriting Foreign Assets for Indian Residents:

Inheritance Tax in India:

India does not have an inheritance tax or estate tax, so there is no tax on the transfer of foreign assets to an Indian resident when inherited.

However, the Indian government may impose taxes on the income generated by these inherited assets, such as rental income, interest, or dividends. The income from foreign assets will be subject to income tax under Section 5 of the Income Tax Act if it is earned by an Indian resident.

Capital Gains Tax on Foreign Assets:

When the inherited foreign assets (such as property or stocks) are sold by the Indian resident, capital gains tax will apply.

The capital gains tax on these assets depends on how long the assets were held by the deceased, as well as the period of holding after inheritance.

• Long-Term Capital Gains (LTCG): If the foreign assets were held for more than two years (in case of real estate) or one year (in case of securities), then the capital gains will be taxed at the long-term capital gains tax rate.
• Short-Term Capital Gains (STCG): If the foreign assets were sold within two years (for real estate) or one year (for securities), then the gains will be taxed as short-term capital gains.

The LTCG rate on foreign assets is generally 20% (with indexation) for real estate and 10% for listed securities if they are long-term assets.

Double Taxation Relief (DTR) through Double Taxation Treaties (DTTs):

India has Double Taxation Avoidance Agreements (DTTs) with several countries. These treaties may offer relief to Indian residents from being taxed on the same income in both the country of inheritance and India.

DTTs generally allow a credit for taxes paid in the foreign country, which can be offset against the Indian tax liability. If the foreign country imposes inheritance or estate tax, the Indian resident may be able to claim a tax credit under the DTT to avoid double taxation.

Foreign Bank Accounts and Income:

Inherited foreign bank accounts and the interest income derived from them are subject to Indian tax as per the Income Tax Act. The income will be considered under income from other sources and taxed accordingly.

It is also important to comply with Foreign Account Tax Compliance Act (FATCA) regulations if the inherited assets include foreign bank accounts.

Disclosure Requirements:

If an Indian resident holds foreign assets, they are required to disclose these in their Income Tax Returns (ITR) under the Schedule FA for foreign assets.

Tax Treatment of Foreign Property (Real Estate):

If an Indian resident inherits foreign property, capital gains tax will be applicable when the property is sold. The capital gains will be calculated based on the Fair Market Value (FMV) of the property at the time of inheritance, and the holding period is considered from the date of inheritance.

The taxation rate on the sale of the inherited foreign property will depend on whether it is considered long-term or short-term, as discussed earlier.

Foreign Securities (Shares, Bonds, etc.):

If the inherited foreign assets include foreign securities (like stocks or bonds), the tax treatment will depend on the capital gains tax rules applicable to securities.

The capital gains tax on these foreign securities will depend on the holding period, as well as whether the foreign security is listed or unlisted.

Dividend income from foreign stocks is also taxable as income from other sources under Indian tax laws.

Filing of Tax Returns for Foreign Inherited Assets:

Inherited foreign assets should be reported in the Income Tax Return (ITR) of the Indian resident, and income derived from these assets (such as interest, dividends, or capital gains) must be included in the taxable income.

Example:

Example 1: Inheritance of Foreign Real Estate

Mr. Sharma, an Indian resident, inherits a property in the USA from his late uncle. The property was acquired by his uncle 15 years ago. Mr. Sharma decides to sell the property after inheriting it.

• Capital Gains Tax: Mr. Sharma will be taxed on long-term capital gains since the property was held for over two years. The gain is calculated based on the Fair Market Value (FMV) of the property at the time of inheritance.
• Double Taxation: If the USA imposes any capital gains tax, Mr. Sharma may claim relief under the India-USA DTT to avoid being taxed twice on the same income.

Example 2: Inheritance of Foreign Stocks

Mrs. Gupta inherits foreign stocks from her brother, who lived in the UK. The stocks were bought by her brother several years ago. Mrs. Gupta decides to sell the stocks in India.

• Capital Gains Tax: The sale of the stocks will attract capital gains tax. Since the stocks were held for a long period, the gain will be treated as long-term capital gains and taxed at 10% without indexation.
• Dividend Income: Any dividend income from the stocks will be taxed as income from other sources.

Example 3: Foreign Bank Account

Mr. Reddy inherits a foreign bank account in Singapore, which generates interest income. The interest is subject to Indian tax as income from other sources. Mr. Reddy must disclose the foreign account details in his Income Tax Return (ITR) under Schedule FA.

Conclusion:

Foreign assets inherited by an Indian resident are not directly subject to inheritance or estate taxes in India, as India does not levy an inheritance tax. However, capital gains tax applies when the assets are sold, and the income generated from foreign assets is taxable in India. The Indian resident may benefit from double taxation treaties (DTTs) with other countries to avoid being taxed on the same income twice. Proper reporting of these assets in the Indian Income Tax Return is mandatory to comply with tax laws.