Inheriting financial assets in India can be emotionally challenging, and for non-resident Indians, the process comes with additional layers of complexity. From regulatory compliance to tax obligations, NRIs must navigate specific rules when they inherit shares, mutual funds, and bonds from relatives in India.
Understanding Your Status as an NRI Heir
When an NRI inherits securities in India, the assets don't automatically convert to NRI holdings. The treatment depends on whether the deceased was a resident Indian or an NRI themselves. If you inherit from a resident Indian, the inherited assets are initially treated as resident holdings, even though you're an NRI. You'll need to take specific steps to convert these holdings to comply with Foreign Exchange Management Act regulations.
The first step is obtaining legal documentation proving your inheritance rights. This typically includes a succession certificate, probate, or legal heir certificate, depending on whether the deceased left a will and the specific requirements of the financial institutions holding the assets.
Demat Account Requirements for NRIs
NRIs cannot hold shares in a regular resident demat account. You'll need to either open an NRI demat account or convert the existing account to NRI status. There are two types of NRI demat accounts: repatriable and non-repatriable. The type you choose depends on whether you want the flexibility to send the proceeds abroad.
A repatriable account is linked to your NRE bank account and allows you to transfer sale proceeds outside India. A non-repatriable account connects to an NRO account and keeps funds within India, though you can remit up to USD 1 million per financial year subject to tax compliance.
Most depositories and banks facilitating demat services allow inherited shares to be transferred to an NRI demat account after proper documentation. You'll need to submit KYC documents, PAN card, proof of NRI status, inheritance documents, and a death certificate of the deceased.
Mutual Fund Holdings and Transmission
For mutual funds, the process involves transmission of units to your name. Asset management companies have specific forms for legal heirs to claim inherited units. Once transmitted, you'll need to update your status from resident to NRI in the mutual fund records.
NRIs can continue holding most equity and debt mutual funds, but there are restrictions on certain schemes. You cannot invest fresh amounts in schemes like tax-saving ELSS funds, though you can hold inherited units. Some fund houses may require you to switch from regular plans to direct plans or redeem certain categories of funds.
The redemption proceeds can be credited to your NRO account. From there, the same repatriation limits apply as mentioned earlier.
Bond and Fixed Income Securities
Government securities, corporate bonds, and debentures inherited by NRIs follow similar transmission procedures. You'll need to approach the issuer or the registrar and transfer agent with appropriate documentation. Interest and maturity proceeds are credited to your NRO account.
NRIs can generally hold bonds inherited from residents, but fresh purchases of certain government securities may be restricted. Check specific eligibility before making new investments in inherited portfolios.
Tax Implications You Cannot Ignore
Inheritance itself is not taxable in India. There's no inheritance tax or estate duty currently. However, any income generated from inherited assets, including dividends, interest, and capital gains, is taxable.
Capital gains tax applies when you sell inherited securities. The cost of acquisition is the value at which the previous owner acquired the asset, not the market value at the time of inheritance. The holding period also includes the period held by the deceased, which can be beneficial for long-term capital gains tax treatment.
NRIs are taxed on Indian-source income. Long-term capital gains on equity shares and equity mutual funds exceeding Rs 1.25 lakh are taxed at 12.5 percent. Short-term gains are taxed at 20 percent. For debt funds and bonds, gains are taxed according to applicable income tax slabs.
Tax is deducted at source on many payments to NRIs at higher rates unless you have a Tax Residency Certificate from your country of residence and can claim benefits under the Double Taxation Avoidance Agreement.
Repatriation Considerations
If you wish to remit the proceeds from sale of inherited assets outside India, ensure proper tax compliance. You'll need to obtain Form 15CA and 15CB, which certify that applicable taxes have been paid. Banks will require these forms along with tax payment proof before processing outward remittances.
This article provides general information only and should not be considered legal, tax, or financial advice. NRIs should consult qualified chartered accountants and legal advisors familiar with cross-border inheritance matters for guidance specific to their situations.
