Indian taxpayers inheriting foreign assets are required to disclose these details in Schedule FA (Foreign Asset) of ITR-2 or ITR-3, depending on applicability. Failure to do so may result in a penalty of Rs. 10 lakh under the Black Money (Undisclosed Foreign Income & Assets) and Imposition of Tax Act 2015. Although the receipt of money through inheritance is tax-exempt under section 56(2)(x), residents must still report foreign assets in Schedule FA.
Exempt Income Declaration: While the inheritance itself is exempt, it is advisable for Indian recipients to also declare it in the Schedule of Exempt Income (Schedule EI) in the Income Tax Return. Inheritance tax or Estate Tax has been abolished in India since 1985, making the recipient of inherited assets or money free from taxation under specific heads.
No Double Taxation Concerns: Section 47(iii) of the IT Act excludes the transfer of capital assets under a will from being considered a “transfer.” Additionally, section 56(2)(x) specifically exempts transfers under wills or inheritance from gift tax. This ensures that there is no double taxation, allowing residents to claim credit for taxes paid abroad.
Transfer to NRE or NRO Account: While FEMA regulations permit the credit of inherited amounts in both Non-Resident External Account (NRE) and Non-Resident Ordinary Account (NRO), it is advisable to deposit the inheritance in the NRE account. Interest on NRE accounts is tax-exempt under section 10(4)(ii) of the IT Act, making it a more favorable option compared to the taxable interest on NRO accounts. Seeking expert advice on FEMA regulations is crucial to ensure compliance with foreign exchange regulations when depositing the inheritance in the NRE account.
