A recent government notice regarding ancestral property tax has created confusion and uncertainty among Non-Resident Indians (NRIs) inheriting family assets in India. The tax department has clarified that all inherited properties will be subject to capital gains tax when sold, even if the new owner is an NRI or overseas citizen of India (OCI).
As per the guidelines, the cost basis of an inherited property will be calculated based on its valuation in 2001 or the actual purchase cost paid by the previous owner, whichever is higher. Several deductions and indexation benefits applying to residents do not extend to NRIs increasing their total tax liability.
These rules have surprised many NRIs who have inherited ancestral homes or land as part of family settlements in India.
Who do the new ancestral property tax guidelines impact?
The updated guidelines on capital gains tax on inherited properties primarily impact:
- Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs) who have received ancestral homes, farms, plots or other real estate as inheritance from relatives in India.
- While existing properties gifted to NRIs living abroad also come under purview, the major effect is on inheritors who are tax residents overseas.
- Second or third generation children of NRIs who have been bestowed family owned assets passed down via succession laws on their parents’ demise.
- OCI cardholders now face similar tax implications as NRIs when inheriting and selling Indian properties after a recent policy amendment.
Experts estimate nearly 5 million NRIs could be dealing with ancestral assets transfers in coming years. This group is worried about substantial tax burdens even though most inherited property sales fund retirement corpuses or major life needs.
Historical cost basis versus 2001 valuation causes confusion
A key aspect of the ancestral property tax rules is the cost basis dependence on 2001 valuations rather than the original purchase cost which created difficulties for many NRI taxpayers:
- Drive towards real estate indexation: Indexed cost method adjusting for inflation is used rather than historical actual cost at which previous owners obtained the property.
- Lack of comprehensive valuation records: Obtaining accurate property values from over 20 years ago especially in rural areas with inadequate infrastructure proves troublesome for those inheriting older properties.
- Higher taxes due to unavailable deductions: Accurate records also essential for claiming deductions, exemptions, etc. which are now inaccessible causing larger capital gains tax incidence for NRI inheritors.
- Subjectivity in valuation reports: Getting registered valuers to provide fair market value estimates often involves subjective opinions on outdated infrastructure development, pricing trends etc leading to inconsistent assessed costs.
- Circular complexity causes taxpayer confusion: Complex wording and frequent circular references make cost basis rules ambiguous to interpret. Lack of accompanying examples, FAQs leave much clarity to be desired.
The combination of such issues during a sensitive period of grief has aggravated difficulties for NRIs handling inherited assets. Harsher tax implications prevent them from smoothly transferring assets even for important needs like medical care or children’s higher education.
Sensible solutions muted so far
Realizing higher revenues from the large diaspora of high net worth individuals seems to be impeding accommodative solutions, claim concerned groups. They recommend:
- Allowing historical cost basis: Using actual cost at which assets were originally purchased rather than mandating 2001 valuations eases process without substantial revenue impact.
- Transparency around valuations: Standardizing valuation guidelines, making circle rates publicly available, regulating valuer licenses etc. to remove ambiguity.
- More exemptions and deductions: Introducing special carve outs similar to available benefits for residents will align the playing field.
However, the government stance remains rigid so far. Authorities suggest technological improvements, such as online portal access, as redressal. However, stakeholders assert that substantive issues persist, including unrealistic valuations, unavailable deductions, and circular complexity. These issues require dedicated reform focus from policy makers.
What are the next steps for concerned NRIs?
As controversies rise around unrealistic tax burdens on inherited property sales, confusion prevails on way forward for NRIs:
- Seeking extensions before sale: Inheritors are deferring property sales while lobbying for relief measures. But this delays fund availability for important life needs.
- Contesting unfair valuations: Obtaining multiple valuation reports, comparing with circle rates etc. to dispute unfavorable cost basis. Success rates vary case-to-case causing more delays.
- Structuring smart partitions: Consulting tax experts to divide assets keeping tax implications in mind before confirming inheritances. Helps mitigate future liabilities.
- Planning property investments: Setting up local investment vehicles for routing inheritances to avail resident tax benefits before property sale. Involves additional compliance requirements.
Managing sentimental values while making such calculations adds further emotional burden for NRIs handling delicate family property transfers from abroad. However, the need for tax certainty will continue to drive their agenda with policy makers.
In conclusion, the ancestral property tax changes reveal gaps between policy intent and practical challenges for NRI inheritors. Addressing their limitations constructively by factoring unique needs will be key to resolving this long standing legacy issue amicably.
