Inherited Property in India by a Foreign National: FEMA & Tax Implications

Facts of the case:

1. There is a property which is jointly held by a couple since the 1970s. The property is in one of the biggest metro cities of India. The husband passed away in the early 1990s, leaving behind the property in the wife's name. All the registration documents were then in the name of the wife. The wife left behind a will stating that, post her death, the property should be distributed between her son and daughter.
2. The daughter here has two daughters, and she has already gifted her share in the property in the name of the two daughters. All the registration documents have also been updated. The son settled in the US and got married to a US national who does not have an OCI and is on a foreign passport.
3. The son passed away, leaving the property without a will. Accordingly as his legal heir, his share in the property should be transferred to the foreign national wife. Divy also has gotten a Letter of Administration (LOA) from the Court of India stating that she is the legal heir to the property which is owned by her husband. However all the registration documents are still in the name of the son as that is still pending to be updated.

Since the aunt is a foreign national, has only visited India a couple of times in all these years, does not want anything to do with the property, and is willing to either gift the property in the name of the two daughters or have the two daughters purchase the property from her and pay her.

Queries:

1. One of the daughters has asked the question whether gifting is an option and whether gifting the share in the property by the aunt to her niece falls under the definition of relatives under the income tax. Will there be any tax implications if the property is gifted?
2. Since the aunt is a foreign national not holding any Indian passport and is not an OCI holder, can the property be transferred in her name upon the death of her husband, who is of Indian origin? Can she gift the property to her nieces or sell the property to the two nieces under the FEMA Act?
3. If FEMA has restrictions then what compliances or permissions can she take from the RBI to get this sorted?

KDP Responses:

1. KDP analyzed the definition of relatives under the Income Tax Act, whether a maternal aunt can gift movable property in the name of her niece, and whether there would be any tax implications if this is undertaken.
2. KDP reviewed the FEMA rules as to whether a foreign national can acquire a property (even if it is an inherited property after the passing of the legal owner of the property) and whether there are any restrictions under FEMA.
3. In case this is not a simple process, KDP also checked what other options the aunt has and whether an application to the RBI seeking permission to transfer the property in the name of the nieces as a gift under FEMA.
4. KDP also suggested that, if it has not been delayed and since the registration documents have not been updated in the name of the aunt, they can explore the possibility that the aunt's name is not registered in the local jurisdiction documents and her share in the property is transferred beforehand in the name of the two nieces. This would serve the purpose, if there are any restrictions under FEMA, and it will be a cleaner transaction. An application to the court will have to be made to amend the Letter of Administration (LOA) and to get her name removed from the property.
5. KDP also made her understand that, since the nieces were Indian residents and wanted to transfer the funds to their aunt as part of relinquishment of her right in the property, then they may be subject to Tax Collected at Source (TCS) compliances and implications in India.

With expertise in FEMA advisory services, NRI taxation, cross-border compliance, and corporate tax matters, KDP helps individuals, entrepreneurs and businesses navigating India’s regulatory framework.

To discuss FEMA, inheritance-related tax considerations or cross-border compliance requirements, connect with us at enquire@kdpaccountants.com