Inheritance tax and inheritance law in India
February 12, 2015
The Global Property Guide looks at inheritance from two angles: taxation, and what inheritance laws apply to foreigners leaving property in In: what restrictions there are and whether making a will is advisable.
How high are inheritance taxes in India?
Technically, any individual is entitled to receive, including by inheritance, property situated in India regardless of his residency or citizenship. But – and here is the problem - the transfer of ownership, and the holding of the property, must adhere to the Foreign Exchange Management Act (FEMA).
According to FEMA Regulation 2000, a nonresident who is a citizen of India can only transfer properties to (a) a resident of India, (b) a citizen but not a resident, and (c) a non-resident of Indian origin. Nonresidents of Indian origin (i.e., not citizens) may in contrast only transfer properties to residents. Non-Indians may only receive Indian properties if they are residents of India.
No inheritance or gift tax is levied in India. However, the recipient of assets is subject to wealth tax.
Net wealth tax is levied at 1% on a taxpayer’s net assets if it exceeds INR3 million (US$47,619). Net assets are computed by deducting debts relating to the properties against their aggregate value. The income tax authorities are generally responsible for assessing the property value. Self assessment is also possible but there are interests and penalties for defaults.
Deepti Anurag and Jayeeta Sengupta of
FoxMandal Little Solicitors & Advocates
What inheritance laws apply in India?
No uniform codified inheritance laws apply in India.
The Constitution of India provides freedom of conscience (i.e., religious faith as a fundamental right). Family law has always been a part of religious law. This means that no uniform code for civil law exists in India, even though it has been put into the Directive Principles of State Policy of the Constitution of India. Since laws of marriage and succession are the most intricate amongst the religious laws, inheritance issues in India are very complicated.
The main laws pertaining to issues related to succession and inheritance by foreigners in India are: The Foreigners’ Act (provision for the government to make orders restricting or prohibiting rights of a foreign citizen) and The Foreign Exchange and Management Act (Acquisition and Transfer of Immovable Property in India).
Different religious groups in India subscribe to different laws. Hindus have their own codified law (Hindu Succession Act) as well as a part uncodified, Muslims have their own textual law of inheritance (Islamic Law on Succession), Parsees come under the Indian Succession Act, as do Christians, as well as others (e.g. spouses with different religions married under The Indian Marriage Act).
The applicable law of inheritance depends on the personal law of the deceased.
The personal law to which the deceased person subscribed applies to matters of inheritance in India. This law may be the textual law of the deceased’s religion, or the codified law of the nation to which the deceased belonged to at the time of death.
If a foreign citizen inherits from a deceased Indian citizen, then the law prescribed for the appropriate Indian religious group applies.
If the deceased was a foreign citizen, then the personal law of his religion or nationality applies. In the instance where the law of the nation to which the deceased foreigner belonged to at the time of death refers the inheritance issues back to India (i.e. place where his/her property is situated), then the applicable law which governs the inheritance of the deceased in India takes precedence.
When problems can arise?
With regard to the complexity and diversity of the applicable laws in India, questions of inheritance by foreign nationals will arise mainly from the following situations:
- A deceased citizen of India having successors who are foreign citizens;
- A non resident Indian, or a person of Indian origin with immovable property in India, who dies intestate, leaving successors who are foreign citizens;
- A foreign citizen owning property in a permissible area of India, or a foreign citizen owning property whilst residing in India, who dies intestate, with successors who are foreign citizens.
- Foreign successors claiming their inheritance on the death of a foreign citizen who was an owner of inherited property in India.
The civil court of the district deals with all matters relating to inheritance.
Inheritance issues are dealt with by the principal civil court of original jurisdiction (district judge’s court) where the property lies, or where the deceased used to live in India before death, or before departing the country.
If the property lies in the jurisdiction of more than one civil court, the High Court (HC) may transfer the matter to one civil court. From there, up to two appeals may be referred to the HC. In special circumstance a Special Leave Petition (SLP) may be allowed for the matter to be considered in the Hon’ble Supreme Court of India, the Apex Court, but only after the second appeal is exhausted, and if special questions of law are involved.
The local laws of the State in which the property is situated determines the stamp duty and court fees.
Disputes relating to succession and inheritance may take as much time as any other civil suit, which varies on a case to case basis, depending on the complexities of the claims, the nature of interpretation of the law, and the number of appeals. Original court requires 4 to 7 years and each appeal may take 2 to 3 years. In exceptional cases, inheritance proceedings in India may not be concluded for two decades.
Only Muslim inheritance laws have a reserved portion in India.
Except for the Muslim laws of inheritance, which require at least 2/3 of the deceased’s property to be inherited by the line of succession and allow up to 1/3 to be settled by testamentary succession, India’s other inheritance laws do not have any reserved portion, i.e. the entire property may be subject to testamentary succession or intestate succession if there is no will.
Orders of intestate succession.
The following is an outline of the orders of succession and the shares of inheritance for heirs in different groups in India:
- If the deceased is a Hindu male (including Buddhists, Sikh, Jain, and all those who are not Christian, Muslim or Parsi):
- Mother being alive (1 share)
- Widow (1 share)
- Living sons (1 share each)
- Living daughters (1 share each)
- Predeceased son having the following relations (1 share)
- daughters – each to be equally divided.
- If the deceased is a female Hindu dying intestate:
- If the deceased is a Muslim:
Class I heirs of a male Hindu who shall simultaneously inherit are:
If a predeceased son of this predeceased son leaves a widow, the living sons and living daughters each shall equally share the share of the predeceased son of the predeceased son who has one share with living sons and daughters. Predeceased daughter (1 share) to be equally shared by sons and daughters of the predeceased daughter.
In case there is none in the class I schedule, the property shall go to the class II based order. The earlier order is preferred over the later, (i.e. if an earlier order is present, the later orders would not inherit):
Order I: Father (whole in the absence of anybody in class I)
Order II: Son’s daughter’s son; son’s daughter’s daughter, Brother, Sister ( all in equal proportion)
Order III: Daughter’s son’s son, daughter’s son’s daughter, daughter’s daughter’s son, daughter’s daughter’s daughter (equally)
Order IV: Brother’s son, brother’s daughter, sister’s son and sister’s daughter
Order V: Father’s father, Father’s mother (equally)
Order VI: Father’s widow, brother’s widow
Order VII: Father’s brother, Father’s sister
Order VIII: Mother’s father, mother’s mother
Order IX: Mother’s brother, mother’s sister
Entry A: Sons (1 share each), Daughters (1 share each), husband (1 share), son and daughter of predeceased son (equally together 1 share), son and daughter of predeceased daughter (equally together I share).
Entry B: Heirs of Husband:
Entry C: Father and Mother
Entry D: Father’s heir
Entry E: Heir’s of the mother
Muslim communities in India predominantly follow Hanafi law, but in some locations follow Shia law. The share of each heir must be ascertained based on individual cases.
The following are four classes of heirs and successors, with provision of exclusion:
- Sharers are those who are entitled to a prescribed share of inheritance. They are heirs by consanguinity and collaterals. Consanguineous heirs are (a) agnets, like father, true grandfather, mother, and true grandmother; (b) descendants, like daughter, son’s daughter and (c) collaterals, like full sister, consanguine sister, uterine brother and uterine sister. Collateral heirs are heirs by affinity, like husband and wife.
- Residuaries are those who are not entitled to a prescribed share, but are entitled to take the residue after the sharers take their prescribed shares. Children of the deceased or of the son of the deceased and the father of the deceased are residuaries. Male descendants of the true grandfather are also residuaries.
- Distant kindred are all blood relations not being sharers or residuaries If there are no sharers or residuaries other than husband or wife the balance shall be given to distant kindred.
- Unrelated successors are those who are acknowledged kinsman, universal legatee and government by escheat. In the absence of relations, the acknowledged kinsman shall succeed. In the absence of any in the group, it will go to universal legatee, and if there is none, the principle of escheat will apply.
Where lineal descendant is present:
- Widow / widower – 1/3 of the property
- Lineal descendants – equally to share 2/3.
- In the absence of lineal descendant, to all grand children, - equally
- In the absence of grandchildren, to great grant children – equally
- Lineal descendant of a predeceased child or lineal descendant of a predeceased child of a predeceased child if present - division is based on equal shares, taking the predeceased child to be alive, and a downward distribution amongst the lineal descendants.
With no lineal descendant:
- Widow /widower – 1/3
- Father – balance entire
- If Father is dead, to mother, to mother, sisters and brothers- equally
- If father is dead, to mother, living sisters and brothers, and children of a predeceased sister or brother- equally so that one share to be taken for the predeceased sister or brother to pass through the lineal descendant to such predeceased.
- Widow / Widower
- Children (equally)
- Living parents-each to get a share equal to half of a child
- Wife and children of a predeceased son to share the share of the child as if the son died after the death of the deceased. If the child predeceased is a daughter, her share would be equally distributed to her children.
The statute provides detail rules of distribution on case to case basis.
The rules on testamentary inheritance are stipulated by law.
Rules regarding the administration of testamentary succession are stipulated in The Indian Succession Act. Procedures are laid down for administering the testamentary succession of all religious groups, except Muslims. Muslims can make a testamentary succession under their own religious law; however, a Muslim cannot transfer more than 1/3. of their property by testamentary succession.
A will is a normal and commonly used course of succession.
The Indian Succession Act provides for every person of sound mind, not being a minor, to dispose of his/her property by will. It is mandatory that the testator possesses the capacity to make such a will.
A foreigner who owns immovable property in India should preferably make a will, because intestate succession can take a long time for settlement. A local will made in India can be granted probate comparatively easily. The foreign owner of immovable property in India however, is not required to make will in India. A will made outside India is also valid.
A will must be in writing, signed by the testator (or by someone at the discretion of and in the presence of the testator). The will must be attested by two or more witnesses.
A will need not be in legal language, and it is not necessary to use technical terms. At the time of interpretation of the will, regard must be taken, not only to the actual words used, but also to the evident intention of the testator. It is therefore essential that the testator makes very clear his/her intention to dispose of property in a will.
Probate may be granted on a copy or draft of a will which has been lost or mislaid since the death of the testator, or if the same has been lost in an accident.
Certain persons are disqualified from inheritance.
Most foreign citizens, if resident in India on work permit, business visa, on declaration of residency, or with prior approval, may acquire property in India by purchase or inheritance; however, citizens of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal or Bhutan cannot acquire or transfer immovable property in India, other than by a lease not exceeding five years.
Under Islamic law, the following persons are disqualified from inheritance: (i) non-Muslims (b) murderers (c) children in the womb (d) illegitimate children (e) daughters, by custom (f) insane or unchaste persons (g) step parents (h) childless widows, by custom and (i) absent heirs.
Under Hindu law, the following persons are disqualified from inheritance: (a) the widow of a pre-deceased son, or son’s son, who remarried during the life time of the deceased (b) the children of a Hindu convert to a non-Hindu religion (c) a murderer.
Gifts can be made during the lifetime of the property owner.
There is little restriction on the gifts of any property during the lifetime of the owner. Owners have full power of disposing of their own property in India by inter vivos. Such gifts however may be challenged in the court of law on certain grounds such as the disqualification of the donor due to mental instability. The decision of the courts on this issue would be on a case to case basis.
Acquisition and transfer of property in India is subject to restrictions.
A foreigner who resides outside India, wanting to acquire property in the permitted area (like Goa Sea Resort, which is specially notified for this purpose) requires prior approval of the Reserve Bank of India (RBI). Foreigners of non-Indian origin who have acquired immovable property in India with the specific approval of the RBI cannot transfer such property without prior permission of the RBI.
No person resident outside India can transfer any immovable property located in India, except when specifically permitted under the regulations. RBI in special circumstances may allow such transfer.
No agricultural land can be acquired by a foreign national or any person resident outside India
Each State Government may impose additional restrictions. For example, a person can not acquire land in J&K, North Eastern States, unless certain conditions are satisfied under the State laws.
Ownership issues are problematic in India.
As a general principle, unless there is an argument of equitable ownership, the Court looks at the title deeds to determine the owners of real property in India. A registered title deed, however, is not always the conclusive proof of ownership of property in India, nor is the land registration record.
Ownership of Hindu undivided family property is complex. In the Mitakshara system of HUF property, ownership passes by birth. If the deceased’s ownership is in HUF property, difficult issues of transfer of ownership are involved.
According to the Indian Succession Act, the wife acquires the domicile of her husband, but no person, by marriage, acquires an interest in the property of his/her spouse. If a person whose domicile is not in India marries in India a person domiciled in India, neither party acquires by marriage any rights in respect of the property of the other spouse, other than those agreed in a pre-marital settlement. Therefore, unless the law to which the deceased subscribed to at the time of his/her death disinherits anyone on grounds of religious conversion, or marrying in a different religion, then there is no discrimination.
There are local laws in some states requiring the joint ownership of properties to be registered if acquired by the husband but not by the wife. In Hindu law, the husband’s property also belongs to the wife but not vice versa.
Properties may be inherited by a child below the age of majority.
Properties may be inherited by a child through a natural guardian, that is a father, or in his absence, a mother. In the absence of parents, there may be a ‘guardian in fact’ such as an elder brother, uncle etc., who is recognized by the court. In the absence of a guardian in fact, the court may appoint a guardian in law. When the court appoints the legal guardian the property is managed by Court of Wards. In any such cases the property of a minor can not be alienated with out the prior permission of the court.