A taxpayer acquiring foreign assets by way of inheritance would be required to furnish the details of the same in Schedule FA (Foreign Asset) of ITR-2 or ITR-3 (as applicable)
Receipt of money under will or inheritance is exempt from tax in India. However, residents (and ordinarily resident) taxpayers are mandatorily required to furnish the details of all foreign assets or accounts in respect of which they are a beneficial owner, a beneficiary or the legal owner, in the Schedule FA.
A taxpayer acquiring foreign assets by way of inheritance would be required to furnish the details of the same in Schedule FA (Foreign Asset) of ITR-2 or ITR-3 (as applicable). Failure to furnish such details in Schedule FA may attract a penalty of Rs. 10 lakh u/s 43 of the Black Money (Undisclosed Foreign Income & Assets) and Imposition of Tax Act 2015.
Also, as such receipt of money on inheritance is exempt under section 56(2)(x) in the hands of the Indian recipient, it would be advisable to also show it under the Schedule of Exempt Income (Schedule EI) in the Income Tax Return, as applicable.
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Is the amount received via Inheritance taxable in India? Can you use DTAA if tax is already paid abroad?
Inheritance tax or Estate Tax has been abolished in India since 1985. Therefore, a taxpayer being a beneficiary in the will of a deceased person, inheriting any capital asset or sum of money shall not be liable to any tax under the head “Capital Gains” or “Income from Other Sources”. Section 47(iii) of the IT Act does not regard the transfer of capital assets under a will as a “transfer”.
Further, section 56(2)(x) of the IT Act specifically excludes such transfer under will or inheritance from the purview of gift tax in the hands of the recipient. Accordingly, there would be no double taxation for the resident taxpayer to be eligible to claim credit of the taxes paid abroad.
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If you are a non-resident in the year the money is transferred, will it make any difference for tax purposes?
The aforementioned Schedule FA would be required to be furnished only by taxpayer who are residents and ordinarily resident in India. As such non-residents would not be required to furnish details of foreign assets received by way of inheritance in Schedule FA of the ITR.
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Should you ask for transfer to your NRE or NRO account?
Interest received on Non-Resident External Account (NRE) account is exempt from tax u/s 10(4)(ii) of the IT Act. Whereas, interest received on Non-Resident Ordinary Account (NRO) is chargeable to tax. Under the FEMA regulations, credit of such inheritance amount is permissible in both NRE and NRO account.
However considering that there is tax exemption on the interest on NRE account and also that the NRE balance is fully repatriable, it would be advisable to deposit the inheritance amount in NRE deposit.
You should also seek an expert’s advice on the FEMA regulations before depositing the inheritance amount in the NRE account, to ensure compliance with the foreign exchange regulations.
The above content is based on inputs shared by Dr Suresh Surana, founder, RSM India, a tax consultancy firm.
