NRI Receiving Inheritance in India -- Tax Obligations, Cost Basis & Filing Guide (2026)

By MKW Advisors -- NRI Tax Desk MKW Advisors | Legal Suvidha | DigiComply

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Receiving an inheritance is one of the most common financial events for NRIs. A parent passes away in India, and the NRI child inherits the family home, bank accounts, fixed deposits, mutual fund investments, or gold. The immediate question: what are my tax obligations?

The good news: India has no inheritance tax. The receipt itself is completely tax-free. But the story does not end there. The inherited assets create ongoing tax obligations -- and when you eventually sell them, the capital gains computation follows specific rules that many NRIs (and their advisors) get wrong.

This guide covers every tax dimension of receiving and managing inherited assets as an NRI, from the day of inheritance through eventual sale or return to India.

"The most common mistake I see is NRIs treating the date of inheritance as the date of acquisition and the market value at inheritance as the cost basis. Both are wrong. The law is clear: you step into the shoes of the previous owner for both cost and holding period. Getting this wrong can mean paying lakhs more in tax than necessary." -- MKW Advisors, NRI Tax Desk

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Table of Contents

1. No Inheritance Tax in India: The Baseline Rule
2. Cost Basis Rules: Section 49(1)
3. The FMV Election for Pre-2001 Acquisitions
4. Holding Period: Previous Owner's Period Counts
5. Indexation: Starting from the Previous Owner's Year
6. Tax on Income from Inherited Assets
7. Filing Obligations in the Year of Inheritance
8. Schedule FA: Foreign Asset Reporting for Returning NRIs
9. Reporting Inheritance in Your Country of Residence
10. Practical Examples
11. Frequently Asked Questions
12. Next Steps

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1. No Inheritance Tax in India: The Baseline Rule

India abolished the Estate Duty Act in 1985. Since then, there has been no inheritance tax, estate tax, death duty, or succession tax in India.

What This Means

• Cash inheritance: Receiving INR 5 crore in a bank account from a deceased parent is completely tax-free for the recipient.
• Property inheritance: Inheriting a house worth INR 10 crore creates no tax liability at the time of inheritance.
• Share/mutual fund inheritance: Inheriting a portfolio worth INR 2 crore is not taxable at the time of receipt.
• Gold inheritance: Inheriting physical gold or gold bonds is not taxable.

Under Section 56(2)(x): Gift Tax Provisions Do Not Apply

Section 56(2)(x) taxes the receipt of money or property without adequate consideration. However, it explicitly exempts property received:

• Under a will or by way of inheritance
• In contemplation of death of the payer/donor

There is no monetary limit on this exemption. You can inherit assets of any value tax-free.

When Does Tax Arise?

Tax arises later, when you:

1. Sell the inherited asset -- capital gains tax applies
2. Earn income from it -- rental income, interest, dividends are taxable
3. Return to India and become a tax resident -- foreign asset reporting obligations kick in

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2. Cost Basis Rules: Section 49(1)

This is the most critical rule for inherited assets.

The Rule

Under Section 49(1) of the Income Tax Act, when a capital asset is acquired by an assessee:

• Under a will
• By inheritance
• By way of gift
• Under a partition of HUF

...the cost of acquisition is deemed to be the cost at which the previous owner acquired the asset.

Who Is the "Previous Owner"?

The "previous owner" is defined under Section 49(1) read with Explanation to Section 2(42A). It is the last person who acquired the asset for consideration (i.e., paid money for it). If the asset passed through multiple generations by inheritance:

Example: Great-grandfather purchased land in 1960 for INR 5,000. Grandfather inherited it. Father inherited it. You (NRI) inherit it in 2025.

• The "previous owner" is the great-grandfather (the last person who acquired it for a price)
• Your cost of acquisition = INR 5,000 (or FMV as on April 1, 2001 -- see Section 3)

Cost of Improvement

Any capital expenditure on improvement by any previous owner after the asset was acquired by the first previous owner is also included. This includes renovation, construction of additional floors, boundary walls, etc. -- but only improvements after April 1, 2001 are included if you elect FMV as on April 1, 2001 as the cost base.

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3. The FMV Election for Pre-2001 Acquisitions

Why This Matters

Most inherited assets were acquired decades ago at negligible costs. Without the FMV election, the capital gain would be enormous.

The Rule: Section 55(2)(b)

If the capital asset was acquired before April 1, 2001, the assessee may, at their option, substitute the Fair Market Value (FMV) of the asset as on April 1, 2001 as the cost of acquisition.

How to Determine FMV as on April 1, 2001

Important Constraint

The FMV as on April 1, 2001 cannot exceed the actual sale consideration. If the FMV is higher than the sale price, you must use the actual cost of acquisition (not FMV) to compute the gain. This prevents artificial losses.

Practical Tip: Get the Valuation Done Now

Even if you are not planning to sell the inherited property immediately, obtain a registered valuer's report for the FMV as on April 1, 2001 now. Obtaining this valuation becomes harder with each passing year -- historical records, comparable sales data, and valuer availability all deteriorate over time.

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4. Holding Period: Previous Owner's Period Counts

The Rule

Under the Explanation to Section 2(42A), the period for which the asset was held by the previous owner is included in the assessee's holding period.

Why This Matters

It determines whether the gain is Long-Term Capital Gain (LTCG) or Short-Term Capital Gain (STCG).

Practical Impact

Almost all inherited immovable property qualifies as LTCG, because the combined holding period of the previous owner(s) and you will exceed 2 years. This means the beneficial LTCG rate (12.5%) applies rather than slab rates.

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5. Indexation: Starting from the Previous Owner's Year

The Indexation Benefit (For Sales Choosing Old Regime)

For property sales where you opt for the old regime (20% with indexation, available for properties acquired before July 23, 2024):

Indexed Cost = Original Cost x (CII of Year of Sale / CII of Year of Acquisition)

For inherited assets, the year of acquisition is:

• The year the previous owner acquired the asset, OR
• 2001-02 if you elect FMV as on April 1, 2001 as the cost

Cost Inflation Index (CII) Table (Selected Years)

Post-July 2024: No Indexation Option

For sales after July 23, 2024, the default rate is 12.5% without indexation. However, for assets acquired before July 23, 2024, you can choose between:

1. 12.5% without indexation (new regime), OR
2. 20% with indexation (old regime, CII up to 2023-24)

Run both calculations and pick the one with lower tax.

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6. Tax on Income from Inherited Assets

While the inheritance itself is tax-free, income generated from inherited assets is taxable:

Rental Income

• Taxed under "Income from House Property" at slab rates
• 30% standard deduction allowed
• If the property is deemed let-out (you do not use it), notional rent is taxable
• TDS at 31.2% if tenant pays >INR 50,000/month to NRI

Bank Account Interest

• NRO interest: TDS at 20% (or 15% under DTAA)
• NRE conversion: Inherited NRO accounts remain NRO; interest is taxable
• FD interest: Taxable in India, claim in country of residence

Mutual Fund Dividends

• Taxable in India above INR 10 lakh (for NRIs, TDS at 20%)
• Below INR 10 lakh: TDS at 10% on the full dividend

Share Dividends

• TDS at 20% for NRIs (domestic rate)
• DTAA rate may be lower (10-15% depending on country)

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7. Filing Obligations in the Year of Inheritance

In India

Question: Does receiving an inheritance require filing an ITR?

The inheritance receipt itself is not income and does not trigger a filing obligation. However, you must file if:

• Your total India-sourced income exceeds INR 3 lakh (new regime basic exemption)
• TDS has been deducted on any Indian income and you want a refund
• You hold Indian assets and want to maintain a compliance trail

In the year of inheritance, you may need to:

1. Apply for transmission of property to your name (mutation in revenue records)
2. Convert bank accounts -- the deceased's accounts will be closed and funds transferred to the legal heir's NRO account
3. Transfer demat holdings -- submit death certificate, succession certificate/probate, and transmission request to the depository participant

No Gift Tax or Inheritance Tax Return

India does not require any separate inheritance tax return, gift tax return, or estate tax return. The legal formalities are civil/succession matters, not tax matters.

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8. Schedule FA: Foreign Asset Reporting for Returning NRIs

Who Must File Schedule FA?

Schedule FA (Foreign Assets and Foreign Income) is required to be filed by individuals who are Resident and Ordinarily Resident (ROR) in India. It is part of ITR-2 and ITR-3.

NRIs Do Not File Schedule FA

If you are an NRI, you do not file Schedule FA. Indian assets are domestic assets for you, and foreign assets are not reportable in an Indian NRI return.

When You Return to India

This is where it gets critical. When you return and become a tax resident:

• Year 1 (RNOR status): If you qualify as Resident but Not Ordinarily Resident, Schedule FA is technically required but foreign income is largely exempt. However, you must still report foreign assets.
• Year 2-3 (transition to ROR): Once you become ROR, you must disclose ALL foreign assets in Schedule FA -- including bank accounts in the US/UK/UAE, foreign property, foreign shares, foreign pension entitlements, and foreign insurance policies.

What to Report in Schedule FA

Black Money Act, 2015

Failure to disclose foreign assets in Schedule FA attracts penalties under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015:

• Tax: 30% of the value of undisclosed foreign asset
• Penalty: Equal to 3x the tax (i.e., 90% of value)
• Prosecution: Rigorous imprisonment of 3-10 years

This is not a theoretical risk. The tax department actively matches Schedule FA disclosures against CRS data received from foreign jurisdictions.

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9. Reporting Inheritance in Your Country of Residence

United States

• No US tax on receiving inheritance (no federal inheritance tax for the recipient, though estate tax may apply to the estate itself -- but Indian estates are not subject to US estate tax)
• FBAR (FinCEN 114): If the inherited Indian bank accounts cause your aggregate foreign account balances to exceed USD 10,000, you must file FBAR
• FATCA Form 8938: If inherited assets exceed the FATCA thresholds, report on Form 8938
• Form 3520: If you receive a foreign inheritance exceeding USD 100,000, you must file Form 3520 (Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts)

United Kingdom

• No UK tax on receipt of the inheritance (UK IHT applies to the estate of UK-domiciled individuals, not to Indian estates)
• Report inherited Indian assets generating income in your self-assessment

Other Countries

Check your country's specific rules. Many countries require disclosure of foreign inheritances above certain thresholds even if no tax is owed.

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10. Practical Examples

Example 1: Inherited Property, Selling After 1 Year

• Father purchased flat in Mumbai in 1995 for INR 8 lakh
• Father passed away in 2024; NRI son inherits the flat
• NRI son sells in 2026 for INR 2.5 crore
• FMV as on April 1, 2001 (registered valuer): INR 40 lakh

Computation (New Regime -- 12.5% without indexation):

• Sale consideration: INR 2,50,00,000
• Cost of acquisition (FMV as on April 1, 2001): INR 40,00,000
• LTCG: INR 2,10,00,000
• Tax at 12.5%: INR 26,25,000 (+ surcharge + cess)

Note: Even though the son held the property for only ~2 years, the father's holding period (1995-2024) counts. The gain is LTCG.

Example 2: Inherited Shares

• Mother purchased 1,000 shares of Infosys in 2003 at INR 500 per share (cost: INR 5 lakh)
• Mother passed away in 2025; NRI daughter inherits
• Daughter sells in 2026 at INR 1,800 per share (proceeds: INR 18 lakh)
• LTCG: INR 18 lakh - INR 5 lakh = INR 13 lakh
• Exemption: INR 1.25 lakh (first INR 1.25L of listed equity LTCG is exempt)
• Taxable LTCG: INR 11.75 lakh
• Tax at 12.5%: INR 1,46,875

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Frequently Asked Questions

FAQ 1: My father inherited the property from his father. What is my cost basis?

Your cost basis is the cost at which the first "previous owner" who acquired it for consideration paid for it. If your grandfather bought it for INR 2 lakh in 1980 and it passed to your father by inheritance and then to you by inheritance, your cost is INR 2 lakh (or FMV as on April 1, 2001 if you elect). The chain goes back to the last person who paid money for it.

FAQ 2: I inherited cash and FDs from my mother. Is this taxable?

No. The receipt of cash and FD principal through inheritance is completely tax-free. However, the interest earned on the FDs from the date they are transmitted to your name is taxable as your income. File ITR if the interest income (combined with other Indian income) exceeds the basic exemption limit.

FAQ 3: Do I need a succession certificate or probate to claim inherited assets?

It depends on the asset type and whether a will exists. For bank accounts, a probate/succession certificate or the bank's own nomination/indemnity process may suffice. For property, mutation requires the registered will or succession certificate. For demat holdings, the depository participant requires a transmission request with legal heir documentation. Intestate succession (no will) requires a succession certificate from a civil court.

FAQ 4: I inherited Indian property but live in the US. Do I need to report this on any US form?

The property itself is not reportable on FBAR or FATCA Form 8938 (those cover financial accounts and financial assets). However, if you receive rental income or sale proceeds in Indian bank accounts, those accounts become reportable. If the inheritance exceeds USD 100,000, file Form 3520 with your US tax return to report the foreign inheritance.

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Next Steps

Inheriting assets in India is tax-free, but managing those assets efficiently -- from cost basis determination to eventual sale or return-to-India planning -- requires careful attention to rules that are often counterintuitive. The FMV election for pre-2001 assets alone can save lakhs in capital gains tax.

MKW Advisors specialises in NRI inheritance and estate tax planning. We help with:

• Cost basis determination with registered valuer coordination for FMV as on April 1, 2001
• Capital gains computation on sale of inherited assets with optimal regime selection
• Asset transmission assistance (mutation, bank account transfer, demat transmission)
• Return-to-India planning including Schedule FA readiness
• Cross-border reporting (Form 3520, FBAR, FATCA) for US/UK/other country obligations

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Get started today:

• Start your NRI tax filing with MKW Advisors
• WhatsApp us at +91-96677 44073 for a quick consultation
• Email: [email protected]

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Disclaimer: This article is for educational purposes and reflects the law as applicable for FY 2025-26 (AY 2026-27). Tax laws are subject to change. Individual circumstances vary. Please consult a qualified tax professional before making any financial decisions based on this content.