NRI Tax on Inherited Property in India: Capital Gains, TDS, and Section 54 Explained

Overview: Is Inheritance Itself Taxable in India?

India does not currently have an inheritance tax or estate duty. Receiving inherited property as an NRI heir is therefore not itself a taxable event under Indian law. However, tax considerations arise when the inherited property is subsequently sold. At that point, capital gains tax applies, and for NRI sellers, there are specific withholding (TDS) obligations that affect the practical management of the transaction.

Capital Gains on Sale of Inherited Property

When an NRI sells inherited property in India, the gain is calculated as: Sale price minus Indexed Cost of Acquisition.

For inherited property, the Cost of Acquisition is the Fair Market Value of the property on 1 April 2001 (or the actual cost to the original owner if acquired after this date), whichever is relevant. The Indexed Cost adjusts this value for inflation using the Cost Inflation Index (CII) published by the Income Tax Department annually.

The nature of the gain depends on the holding period — but for inherited property, the original owner's holding period is included when calculating the heir's holding period. Property held (across original owner and heir) for more than 24 months qualifies as a Long-Term Capital Asset. The gain is taxed at 20% with indexation.

TDS on NRI Property Sales — The Critical Practical Issue

When a buyer purchases property from an NRI, the buyer is legally required to deduct TDS (Tax Deducted at Source) before making payment. The applicable TDS rates for NRI sellers are:

• Long-term capital gains: 20% (plus applicable surcharge and cess)
• Short-term capital gains: 30% (at the applicable income tax slab rate)

This TDS is deducted by the buyer and deposited with the Income Tax Department. The NRI seller then files a tax return claiming credit for the TDS and seeking a refund of any excess deducted.

Applying for a Lower TDS Certificate (Section 197)

If the actual tax liability is lower than the TDS being deducted, the NRI seller can apply to the Income Tax Officer for a Lower Deduction Certificate under Section 197 of the Income Tax Act, 1961. This certificate, if granted, allows the buyer to deduct TDS at a lower rate — reducing the cash flow impact on the seller. The application must be made before the transaction is completed and requires submission of documentation including the computation of gains, the title document, and identification of the buyer.

Section 54 Exemption

An NRI seller can claim exemption from long-term capital gains tax under Section 54 if the gain is reinvested in the purchase of one residential property in India within the specified timeframe (one year before or two years after the sale date, or three years if constructing a property). The exemption is limited to the amount reinvested — gains exceeding the reinvested amount are still taxable.

Form 15CA and 15CB

Repatriation of sale proceeds from India requires the NRI seller to file Form 15CA (online declaration) and obtain Form 15CB (Chartered Accountant certificate) before the remittance is processed by the bank. These documents certify that applicable taxes have been paid on the amount being remitted.

How Varasa Can Help

Varasa assists NRI families in understanding the tax implications of selling inherited property — coordinating with qualified tax professionals, managing the TDS application process, and structuring the documentation required for compliant repatriation of proceeds.