NRI selling inherited property in India? Agricultural land, farmhouse, and plantation property have stricter sale and repatriation rules

For NRIs, just because they can inherit property in India doesn’t mean they can sell it to anyone or freely take the money abroad. Two separate questions need to be answered here: Can the inherited property be sold? Also, can the sale proceeds be repatriated outside India?

The rules get stricter when the inherited property is agricultural land, a plantation property or a farmhouse. Factors like the type of property, the buyer, and how the property was originally acquired can all influence the sale and the ability to repatriate the proceeds.

Can NRIs inherit and sell property in India?

An NRI or OCI can inherit immovable property in India under Rule 24 of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019. They can inherit property from someone living (resident) in India without prior RBI approval.

“Inheritance from a person resident outside India is also permissible, provided the deceased had acquired the property in accordance with the foreign exchange laws applicable at the time of acquisition,” says Divi Dutta, Partner at Khaitan & Co.

However, there are specific rules for citizens of certain countries, including Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal, Bhutan, Macau, Hong Kong and the Democratic People's Republic of Korea. They continue to need prior RBI approval to acquire or transfer immovable property in India in the circumstances specified under the RBI Master Direction, she adds.

It is also important to distinguish between how the property was acquired and what type of property it is. "Inherited" describes the mode of acquisition, while "agricultural", "residential" or "commercial" describes the nature of the property.

Once inherited, the property can generally be transferred under Rule 25 of the NDI Rules, subject to the applicable conditions. For inherited residential or commercial property, an NRI can generally sell it to:

• A person resident in India
• Another NRI
• An OCI

The rules are different for agricultural land, plantation property and farmhouses.

The fact that a property was inherited does not by itself make all future transfers unrestricted. The NRI first needs to identify the nature of the property and then check whether the proposed buyer is eligible to purchase that particular type of property under FEMA.

Agricultural land, plantation property and farmhouses have stricter sale rules

NRIs are generally not allowed to acquire agricultural land, plantation property or farmhouses by purchase or gift.

“Under the FEMA framework, NRIs are generally prohibited from acquiring such properties by way of purchase or gift. However, they may lawfully acquire them through inheritance from a person resident in India or from a person resident outside India who had acquired such property in accordance with the provisions of FEMA,” says Sadia Khan, Partner, Private Client Practice, Shardul Amarchand Mangaldas & Co.

However, the rules for transferring such inherited property are stricter.

“Although an NRI may lawfully own such property if acquired through inheritance, it may ordinarily be transferred only to a person resident in India, and the sale proceeds of such inherited properties are non-repatriable, save and except to the extent permitted under the USD 1 million facility given to NRIs,” says Khan.

The question of repatriation of the proceeds from the sale of self-purchased agricultural land, farmhouse, or plantation property by an NRI does not arise, since NRIs are not permitted to acquire such properties (other than by way of inheritance) in the first place, she adds.

For example: If an NRI inherits agricultural land, a plantation property or a farmhouse from a parent in India, they may be able to sell the inherited land to a person resident in India. However, the NRI should not assume that it can be sold to another NRI or OCI simply because the property was legally inherited. The eligibility rules for buyers of agricultural land are stricter.

Can an NRI freely repatriate the sale proceeds?

Selling a property and taking the money abroad are two separate issues under FEMA.

“While the permissibility of the transfer is governed by Rule 25 of the NDI Rules, the repatriation of the sale proceeds is governed separately under the Foreign Exchange Management (Remittance of Assets) Regulations, 2016, the RBI Master Direction – Acquisition or Transfer of Immovable Property under FEMA and the RBI Master Direction – Remittance of Assets,” says Dutta.

According to Dutta, the amount that can ultimately be repatriated depends on three key factors:

• Source of the acquisition: Properties acquired using foreign exchange, NRE account funds or FCNR(B) deposits may qualify for the special repatriation facility under Paragraph 8.2, whereas properties acquired using domestic rupee funds generally fall within the USD 1 million NRO remittance framework.
• Nature of the property: Agricultural land, plantation property, and farmhouses do not qualify for the special repatriation facility and are ordinarily repatriated through the NRO route.
• Mode of acquisition: Property acquired through inheritance or legacy generally follows the NRO remittance route, even though the acquisition itself is protected under Section 6(5) of FEMA.

The outward remittance of these sale proceeds is also subject to Income-tax Act compliance.

How much can an NRI repatriate from an NRO account?

Remittance of assets permits authorised dealer (AD) banks to allow NRIs and OCIs to remit up to USD 1 million during each financial year out of balances held in their NRO accounts, including sale proceeds of assets acquired by purchase, inheritance or legacy, subject to the prescribed documentary evidence and compliance with the applicable tax laws.

“The USD 1 million limit is an aggregate annual limit and applies to all remittances from the NRO account. Consequently, sale proceeds of immovable property share this limit with other eligible NRO balances such as rental income, interest, maturity proceeds and inherited assets,” says Dutta.

If the sale proceeds exceed the available limit, the balance amount can usually be remitted in subsequent financial years. Additionally, Paragraph 4.1 of the Master Direction says that remittances over USD 1 million per financial year require prior approval of the RB, she says.

What documents are required to repatriate sale proceeds?

Repatriation is not automatic. Before allowing funds to be remitted overseas, the authorised dealer (AD) bank verifies compliance with FEMA, RBI regulations and the Income-tax Act, 1961.

“Accordingly, the AD bank ordinarily verifies the seller's residential status, the nature and mode of acquisition of the property, the source of the original acquisition funds (where repatriation is sought under Paragraph 8.2 of the RBI Master Direction – Acquisition or Transfer of Immovable Property under FEMA), the amount eligible for repatriation, and compliance with the applicable tax obligations,” explains Dutta.

According to Sunil Kumar, Partner, Tax and Regulatory Services, EY India, NRIs are generally required to submit:

Sale deed, original acquisition documents, inheritance-related documents (where applicable), evidence of the source and movement of funds, Form A2, applicable tax payment/withholding proofs, and the necessary declarations and undertakings.

Once the AD bank is satisfied that all FEMA and tax requirements have been complied with, it may permit outward remittance of the eligible sale proceeds.