NRI taxation: Income arising from use of asset inherited is taxable

I am an NRI living in California. Recently, I got my share of family property worth ₹60 lakh. As I don’t need this money, I have decided to give ₹30 lakh to my friend for him to invest in a business. I have given ₹20 lakh to my brother-in-law and deposited the remaining ₹10 lakh in my wife’s account who lives in India. What will be the tax implication, if any? What proof will I need for income tax purposes when making these transactions?

—Name withheld on request

Under the India income tax law, the value of any asset received under a Will or by way of inheritance is not taxable in India. However, the income arising from transfer or use of inherited property in India will be taxable in India. If you have received a sum of money under Will or inheritance, no tax is payable on such receipt.

If the family property has been sold in India, it will be taxable in India in the year of sale of property in the hands of the seller. Any immovable property held for a period of more than 24 months is classified as long-term capital asset. For inherited property, the holding period would be calculated from the date of acquisition by the original owner.

In case of a long-term capital asset, taxable capital gain will be net sale proceeds less indexed cost of acquisition (i.e. adjusted as per cost of inflation index or CII) less cost of improvement. Long-term capital gain is taxable at 20% (plus applicable surcharge and education cess). The long-term capital gain can be claimed as exempt from income tax to the extent it is re-invested in India in specified bonds or one residential house in India (to be either purchased within one year before or two years after or constructed within three years of transfer of the long-term capital asset). There are certain restrictions, however, on the sale of a new house bought or acquisition of another residential house and amount of investment made in bonds.

Tax on capital gain can be either paid by way of advance tax in four instalments (15% by 15 June, 45% by 15 September, 75% by 15 December and 100% by 15 March) or before filing of a tax return by way of self-assessment tax along with interest by 31 July.

Further, under the law, income tax is payable on any sum of money received by an individual without consideration exceeding ₹50,000 per financial year except if the same is received from a “relative” (as defined) or other specified circumstances (including under Will or inheritance as mentioned earlier).

Transfer of money to your friend for investment purpose will not be taxable if you have bought certain financial interest in the business (such as shares, debentures etc.) or provided as a loan. However, if the money has been transferred without any consideration, it will be taxable in the hands of the recipient (i.e. your friend) as the amount gifted is more than ₹50,000.

Transfer of money to your wife and brother-in- law will not be taxable in India in the hands of the recipient as they are covered under the definition of “relative”. You may prepare a gift deed to document the transaction and for your records. However, income arising to your wife from such gift will be clubbed in your hands.

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