Tax Implications for NRIs Inheriting Agricultural Land in India

Inheriting agricultural land in India as a Non-Resident Indian (NRI) involves several legal and tax considerations. NRIs must follow a structured approach to ensure a smooth transfer of ownership and compliance with the relevant laws. This comprehensive guide will walk you through the essential steps and tax implications associated with inheriting agricultural land in India.

Legal Framework and Steps to Secure Ownership

Obtain a Legal Heir Certificate

• Purpose: A legal heir certificate is essential to confirm the rightful heirs of the deceased. This document is necessary to claim ownership of the inherited agricultural land and update the land records.
• Process: NRIs must apply to the local revenue office or competent court in the jurisdiction where the deceased person resided. The application should include key documents like the death certificate, identity proofs of all legal heirs, and documents proving each heir’s relationship to the deceased.
• Importance: This certificate is the first step in establishing the NRI’s right to the property and is required for further legal processes like the mutation of the property.

Secure a Succession Certificate (if necessary)

• When Needed: A succession certificate may be required if the deceased left a will or if disputes arise among the legal heirs. This certificate proves the heir’s right to inherit the property and is particularly important when dealing with financial assets.
• Application: The succession certificate is obtained from the civil court, involving filing a petition and issuing a legal notice to all heirs. The court will issue the certificate after verifying the legitimacy of the claims.
• Legal Significance: This certificate provides the legal authority to manage and distribute inherited assets, including agricultural land, per the will or legal entitlements.

Mutation of Property

• Definition: Mutation is the process of updating the revenue records to reflect the change in ownership of the land following inheritance. It ensures that the land is officially registered in the name of the legal heirs.
• Steps: NRIs must submit the legal heir certificate, death certificate, and other necessary documents to the local revenue office. This process ensures that the land records are updated and the new ownership is legally recognized.
• Outcome: Completing the mutation process is essential for NRIs to legally manage, sell, or lease agricultural land. Without mutation, the inherited land may still be recorded in the deceased’s name, leading to potential legal complications.

Compliance with FEMA Regulations

• Reporting: The Foreign Exchange Management Act (FEMA) governs the ownership of property by NRIs in India. While NRIs can inherit agricultural land without special permission, it is advisable to report the inheritance to the Reserve Bank of India (RBI) if necessary.
• Usage Restrictions: According to FEMA regulations, the inherited agricultural land must be used strictly for agricultural purposes. NRIs cannot convert this land for non-agricultural purposes or sell it to parties ineligible to purchase agricultural land under Indian law.
• Repatriation Rules: If an NRI decides to sell the inherited agricultural land, there are specific rules for repatriating the sale proceeds. NRIs may need to obtain a No Objection Certificate (NOC) from the Income Tax Department and seek approval from the RBI for repatriation.Let us understand this in a bit more detail:

Who Can NRIs Sell Agricultural Land To?

• Indian Citizens: NRIs can only sell inherited agricultural land to Indian citizens residing in India. This restriction ensures that agricultural land remains within the country and is used for its intended agricultural purposes.
• Prohibition on Sale to Foreign Nationals: NRIs are not allowed to sell agricultural land to foreign nationals or other NRIs. This aligns with FEMA regulations, which aim to protect India’s agricultural resources.
• Compliance with FEMA Regulations: The sale must comply with FEMA guidelines, including ensuring that the sale proceeds are credited to a Non-Resident Ordinary (NRO) account. There are also limits on repatriating these funds, subject to tax compliance.
• Documentation and Tax Considerations: The sale of agricultural land is subject to capital gains tax, depending on whether the land is classified as rural or urban. Rural agricultural land is generally exempt from capital gains tax, while urban agricultural land may be taxed based on the duration of ownership.
• Gifting Provisions: NRIs can receive agricultural land as a gift only from close relatives who are Indian residents. However, NRIs cannot gift agricultural land to other NRIs.

Tax Compliance and Budget 2024 Updates

Income Tax on Agricultural Income:

• Exemption from Income Tax: Agricultural income is exempt from central income tax under Section 10(1) of the Income Tax Act, 1961. This exemption applies to:
  • Rent or revenue derived from agricultural land.
  • Income generated from agricultural operations.
  • Income from farm buildings used for agricultural purposes.
• Applicability of Tax Exemption:
  • If your total agricultural income is less than ₹5,000 per year, you are fully exempt from tax on it.
  • If agricultural income is your only source of income, the exemption applies fully.
  • If your total income, excluding agricultural income, is less than the basic exemption limit, and you have both agricultural and other income, the exemption also applies.
• Partial Integration with Non-Agricultural Income:
  • If your non-agricultural income exceeds the basic exemption limit, a portion of your agricultural income may be taxed by partially integrating it with your non-agricultural income. The tax is calculated in three steps:
    1. Calculate tax on total income (agricultural + non-agricultural).
    2. Calculate tax on basic exemption limit + agricultural income.
    3. The difference between (1) and (2) is your final tax liability.
• State-Level Agricultural Income Tax:
  • While agricultural income is exempt from central income tax, some states like Assam, Odisha, Tamil Nadu, and West Bengal levy agricultural income tax at the state level. The tax rates and rules vary by state, with some exempting staple foods but taxing commercial crops like tea, coffee, and rubber.

Capital Gains Tax on Sale:

• Long-Term Capital Gains (LTCG): If the land is held for more than 24 months before being sold, it qualifies as a long-term capital asset. The gain is taxed at 20% with the benefit of indexation, which adjusts the purchase price for inflation.
• Short-Term Capital Gains (STCG): If the land is sold within 24 months of inheritance, the gains are considered short-term and added to the NRI’s total income, taxed at the applicable slab rate.
• Rural vs. Urban Agricultural Land: Rural agricultural land is not considered a capital asset, so no capital gains tax arises from its sale. However, urban agricultural land is subject to capital gains tax.

Key Changes in Budget 2024:

• Exemption Increase: The exemption limit on LTCG has been increased from ₹1 lakh to ₹1.25 lakhs per annum, allowing NRIs to exempt gains up to this amount from taxation when selling agricultural land.
• Tax Rate Options: The amendment to the Finance Bill 2024 allows taxpayers to choose between two methods for calculating LTCG:
  • 12.5% Tax Rate without Indexation: This option allows for a lower tax rate without the benefit of adjusting for inflation.
  • 20% Tax Rate with Indexation Benefit: Taxpayers can opt for a 20% tax rate while benefiting from indexation, which adjusts the purchase price for inflation, potentially reducing the taxable gain.
• Holding Period: Agricultural land qualifies as a capital asset, and the nature of capital gains (long-term or short-term) depends on the holding period:
  • Long-Term Capital Gains: If the land is held for more than 2 years, it is classified as long-term, and the applicable tax rates mentioned above will apply.
  • Short-Term Capital Gains: If sold within 2 years, gains are taxed at the applicable income tax slab rates.

Conclusion

Inheriting and selling agricultural land in India as an NRI involves navigating a complex legal, tax, and regulatory landscape. While agricultural income is generally exempt from central income tax under Section 10(1) of the Income Tax Act, it may be subject to state-level taxes and partial integration with non-agricultural income, leading to potential taxation.

NRIs should be aware of the specific restrictions on selling agricultural land, particularly the requirement to sell only to Indian citizens residing in India, and the importance of adhering to FEMA guidelines. The updates in Budget 2024 offer new options for managing capital gains tax, including an increased exemption limit and flexible tax rate options, making it crucial for NRIs to plan their transactions carefully.

By following the outlined steps—obtaining the necessary certificates, complying with FEMA regulations, ensuring proper tax compliance, and consulting with legal and financial experts—NRIs can protect their rights and ensure a smooth inheritance and sale process.

For more information on the implications of inheriting and selling agricultural land in India, you can reach out to us at [email protected].