ITR filing in July: As per the provisions outlined in the Income Tax Act of 1961, it is clarified that no tax liability is incurred upon the inheritance of assets, be they movable or immovable in nature. Nonetheless, a tax obligation arises should the subsequent owner opt to sell the property. When an individual dies, their assets and belongings are typically passed down to their designated legal recipients, which may include offspring, grandchildren, or dependents.
In scenarios involving movable assets such as mutual funds, gold, shares, and the like, the new possessor is initially exempt from tax burden. In many cases, the acquired assets, like real estate or investments, generate revenue, such as rental payments or dividends, for the inheritor. Consequently, it is the responsibility of the inheritor to accurately report these earnings and fulfill the necessary tax obligations associated with it. It is imperative to note that the tax liability takes effect only upon the eventual disposition of said movable assets by the inheritor.
Sale of ancestral property
As per Section 54 of the Income Tax Act (ITA), an individual is allowed to park the sale proceeds on account of the sale of a residential house property under the Capital Gain Account Scheme, 1988 (“Scheme”) before furnishing the return of income and in any case not later than the due date to file an original return of income under section 139(1) of the ITA (generally 31st July of assessment year).
The amount so deposited under this Scheme shall be deemed to be the cost of the new asset and shall be eligible for the purpose of claiming exemption under Section 54 of the ITA. However, if the amount deposited under this Scheme is not utilised, wholly or partly, for the purchase or construction of the new house property within the specified period, then such unutilised amount shall be chargeable to tax in the previous year in which the period of three years from the date of the transfer of the original asset expires, and you shall be entitled to withdraw the unutilised amount in accordance with the Scheme.
It is to be noted that the maximum amount of exemption under section 54 is Rs 10 crore.
Taxation for NRIs
Taxpayers deriving any gains on account of sale/ transfer of ancestral property or self owned property would be taxed under the head “Capital Gains”. Long-term capital asset (with holding period of more than 24 months) would be subject to capital gains tax at 20% (after indexation) u/s 112 of the IT Act. On the other hand, short-term capital assets would be taxed as per the marginal slab rates applicable to the NRI investor.
“It is pertinent to note that non-residents shall be eligible to claim long term capital gains exemption u/s 54 of the IT Act by investing the sale proceeds in acquiring or constructing another residential house property and u/s 54EC by investing the sale proceeds in specified tax saving bonds. Since there are no separate rules for taxation of house property in India for residents and non-residents, rental income earned from residential house properties by non-residents shall be taxable under “Income from house property” after deducting the municipal taxes paid by the owner and availing the benefit of section 24 of the IT Act, i.e., standard deduction of 30% and Interest on borrowed capital),” said Suresh Surana, Founder, RSM India.
However, it is pertinent to note that in case the non-residents, they may be entitled to claim the treaty benefit under Double Tax Avoidance Agreement of India and the relevant home country.
The Double Tax Avoidance Agreement (DTAA) signed by India with various countries establishes a predetermined rate for deducting taxes on income disbursed to residents of those nations. This implies that Non-Resident Indians (NRIs) receiving income in India will be subject to Tax Deducted at Source (TDS) based on the rates specified in the respective DTAA.
The Finance Act of 2021 included Section 89A to address the issue of double taxation faced by NRIs with funds in foreign retirement accounts held in specified countries. This provision applies to “specified persons” – individuals who have become residents of India, opened an account in a notified country while non-resident, and are now residents of that country. The new rule specifies that this income will be taxed according to prescribed methods and timelines.
In the context of retirement benefits, a “notified account” is one that is created by a designated individual in a particular country for the purpose of storing income. In this type of account, the income is not subject to taxation as it accrues, but is instead taxed by the country upon receipt.
How to claim DTAA Benefits?
The benefit of DTAA can be claimed by three methods:
Deduction: Taxpayers can claim the taxes paid to foreign governments as a deduction in the country of residence.
Exemption: Tax relief under this method can be claimed in any one of the two countries.
Tax credit: Tax relief under this method can be claimed in the country of residence.