An NRI can inherit agricultural land from a resident Indian but not buy it

Can non-resident Indians (NRIs) own or inherit agricultural land? I recently inherited a land from my father. I want to sell it to my NRI friend who lives in Dubai. Please advise.

—Murli Biswas

Under the exchange control law, NRIs cannot own an agricultural land in India. However, they may acquire such agricultural land through inheritance from a person residing in India. Accordingly, you may inherit an agricultural land.

However, an agricultural land in India can only be sold to a person who is a resident in India. Accordingly, you cannot sell your agricultural land in India to your NRI friend.

My father and I are Singapore citizens and he recently inherited a bungalow in Kerala. He also inherited a flat in Kochi that has rental income. We want to sell everything. What will be the tax that we will have to pay on inheriting and selling the land? Also, what will be tax implication of rental income received?

—Ravi Singh

Under the Income-tax law, the value of any assets 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 intend to let out the property, rental income from the property situated in India is liable to income tax in India.

Also, any repayment of the principal amount against a housing loan taken for such property is eligible for deduction under Section 80C (up to ₹1.5 lakh).

If you intend to sell the immovable property, it will be taxable in India in the year of sale. Any immovable property held for a period of more than 24 months is classified as a long-term capital asset (LTCA). For inherited property, the holding period will be calculated from the date of acquisition by the original owner (the person who first purchased the property). In the case of LTCA, the taxable capital gain will be the net sale proceeds less indexed cost of acquisition (adjusted as per the Cost Inflation Index or CII) less indexed cost of improvement. Long-term capital gain (LTCG) is taxable at 20% (plus applicable surcharge and health and education cess). Short-term capital gains is taxable at applicable slab rates (plus applicable surcharge and health and education cess) without any indexation for cost of acquisition or cost of improvement.

LTCG can be claimed as tax-exempt if it is reinvested 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 the transfer of the property). Effective FY20, LTCG can be reinvested in two residential houses in India if it doesn’t exceed ₹2 crore. The option to reinvest LTCG in two residential houses in India is available only once in a lifetime. For tax exemption to continue, the new residential house or houses should not be transferred within three years from the date of purchase or construction. Also, there is a restriction of ₹50 lakh as the amount of investment to be made in specified bonds.

Sonu Iyer is tax partner and people advisory services leader, EY India