The Foreign Exchange Management Act (FEMA) regulates all foreign exchange and cross-border financial transactions in India. It is primarily concerned with managing foreign exchange markets, facilitating external trade, and ensuring compliance with foreign exchange regulations. While FEMA is designed to govern the movement of funds in and out of India, it also has implications on inheritance issues, particularly for non-resident Indians (NRIs) and foreign nationals inheriting assets in India or for residents inheriting assets abroad.

Inheritance issues under FEMA are complex, as they intersect with both foreign exchange regulations and Indian inheritance laws. This article explores the key aspects of inheritance under FEMA, focusing on issues faced by NRIs, foreign nationals, and Indian residents inheriting assets across borders.

Key FEMA Provisions Relating to Inheritance

1. Inheritance of Assets in India by Foreign Nationals and NRIs
   • FEMA permits foreign nationals and NRIs to inherit immovable property or other assets in India under certain conditions. The regulations regarding the inheritance of Indian property by NRIs are primarily governed by the guidelines provided by the Reserve Bank of India (RBI).
2. Repatriation of Inherited Assets:
   • When it comes to repatriation of inherited assets (i.e., transferring funds from India to a foreign country), FEMA provides specific guidelines based on the type of assets involved and the resident status of the heir. Typically, repatriation is allowed subject to certain conditions. For example, an NRI can repatriate the inherited amount, but the money must be transferred through an NRE (Non-Resident External) account or an FCNR (Foreign Currency Non-Resident) account.
   • The repatriation of proceeds from the sale of immovable property or other assets by foreign nationals or NRIs may require approval from the RBI or authorized dealers (banks).

Inheritance of Immovable Property

Under FEMA, the inheritance of immovable property (real estate) in India by non-residents is subject to the following provisions:

1. NRIs and PIOs (Persons of Indian Origin):
   • NRIs and PIOs are allowed to inherit residential or commercial property in India from a resident. There is no restriction on the type of property they can inherit, whether it is agricultural land, plantation property, or farmhouses. However, agricultural land or plantation property is not transferable to foreign nationals under Indian law.
2. Foreign Nationals:
   • Foreign nationals of non-Indian origin are generally prohibited from acquiring immovable property in India, except in specific circumstances. For instance, foreign nationals who inherit property in India can retain it under the conditions prescribed by FEMA. However, they cannot purchase property, unless they fulfill the requirements under the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2018.
   • Foreign nationals inheriting immovable property in India will not be able to sell or transfer the property unless they obtain the necessary regulatory approvals. The sale proceeds, however, may be repatriated if they satisfy the required conditions under FEMA.

Repatriation of Inherited Funds

1. NRIs and PIOs Repatriating Inherited Funds:
   • NRIs or PIOs inheriting money or assets in India can repatriate funds to their foreign country, subject to the following conditions:
     • The funds must be transferred through their NRE or FCNR account.
     • The amount repatriated cannot exceed the value of the inherited funds.
     • The property or assets from which the inheritance is derived must be in compliance with FEMA regulations, ensuring that there are no breaches of foreign exchange laws.
2. Taxation and FEMA Compliance:
   • While FEMA deals primarily with the movement of funds, the Income Tax Act governs the taxation of inheritance. It is essential for the inheritor to declare any income arising from the inheritance as per the tax laws.
   • Repatriation of the sale proceeds of inherited immovable property by an NRI is permissible, but it must be in line with the tax obligations and capital gains tax that may arise due to the sale of property.
   • Foreign nationals inheriting funds or assets in India are subject to capital gains tax if they sell the property. The tax rate varies based on the type of asset (e.g., short-term or long-term capital gains) and the duration of holding the property.

Transfer of Foreign Assets to India

When Indian residents inherit foreign assets (e.g., from a foreign relative), the transfer and repatriation of such assets to India must comply with the following guidelines:

1. Repatriation of Foreign Funds to India:
   • If a resident Indian inherits funds from abroad, they can bring the money into India through their NRO or NRE accounts. However, the remittance of foreign funds into India must be made in accordance with FEMA guidelines.
   • The inheritance proceeds brought into India are not subject to Income Tax if they are from a close relative (as defined under the Income Tax Act, 1961). However, any interest earned on such inheritance may be subject to taxation.
2. Foreign Assets of Indian Residents:
   • Indian residents may also inherit foreign assets from a relative who is domiciled outside India. However, the asset must be transferred through the appropriate channels to comply with FEMA regulations for repatriation of funds or physical transfer of assets.

Documentation and Reporting Under FEMA

1. Documentation for Inheritance:
   • Legal Heirship Certificate: A legal heirship certificate issued by the relevant authority may be required to prove the identity of the legal heir.
   • Will or Succession Certificate: In cases where the inheritance is based on a will, the heir must obtain a succession certificate or the probate of the will, as applicable.
   • Declaration of Assets: The heir must declare any foreign assets or funds under the Income Tax Act, and any cross-border transactions need to be reported as per FEMA.
2. FEMA Reporting Requirements:
   • In cases of inheritance of assets abroad or the repatriation of foreign funds to India, the transfer of such funds must be reported to the authorized dealer bank under FEMA guidelines. The reporting will typically include the amount, source, and recipient details.

Challenges and Issues Faced by NRIs and Foreign Nationals

• Legal Complexities: Inheritance laws differ in various countries. NRIs and foreign nationals may face difficulties in understanding the legal and tax implications of inheriting assets, especially in the case of cross-border inheritances.
• Repatriation Restrictions: While repatriation of inherited assets is allowed, there are conditions and limits that could complicate the process for NRIs and foreign nationals.
• Taxation: Inherited assets may be subject to capital gains tax when sold. Additionally, NRIs and foreign nationals may also have tax liabilities in their home countries, adding complexity to the tax structure.

Conclusion

Inheritance under FEMA primarily deals with the movement of funds and assets across borders. It ensures that the transfer of inherited assets from India or to India complies with the regulations of the Reserve Bank of India (RBI) and other related authorities. While NRIs and foreign nationals are allowed to inherit assets in India or abroad, they must adhere to the prescribed legal procedures for repatriation, documentation, and compliance with tax laws.

Navigating inheritance issues under FEMA requires careful planning and adherence to the regulatory framework to ensure that cross-border inheritance is handled smoothly and legally. Consulting with financial and legal experts is highly advisable for those dealing with inheritance in foreign jurisdictions.