Gifts and Inheritances from India – Tax implications & Tax planning

Practice Areas

By: Satya Yeruva

More and more people are becoming globally mobile, relocating from country to country. Immigrants from India to the United States have been increasing year on year. The Indian population has surged since the 1990s to become one of the largest immigrant group in the United States. This has resulted in an increasing transfer of property or other assets from India to the United States.

One of the questions most frequently being asked is “will I be subject to tax on an inheritance or gift from abroad if I bring the asset into the United States?”

This articles explains the tax implications in the United States and India when as a United States resident (Citizen / Green Card holder / US residents) when they receive gifts / inheritances from India to the United States.

  1. US residents receives gifts from parents in India.
    India tax implications:

    • In India, Gift tax is levied in the hands of receiver.
    • No gift tax for both receiver (being US resident) and payer (being gift tax levied in the hands of receiver) in case of gifts received by US residents from Indian parents.
    • Tax is levied only on the income generated from such gifts.
    • Capital gains tax is levied at the time of sale of property if the gift is a capital asset subject to capital gain
    • The cost basis is same as cost to the original owner for computation of capital gains. It is to be noted that indexation is allowed on the original cost i.e. cost adjusted to the inflation. US resident will be able to claim the taxes paid in India on their US tax returns.

    US tax implications:

    • In US, tax on gifts is levied in the hands of the donor. So no gift tax in US as there is no tax liability for recipients. Also US gift tax applies if person making the gift is US taxpayer.
    • Capital gains tax is levied at the time of sale of the property, if the gift is a capital asset subject to capital gain taxation.
    • The cost basis is taken as “cost to the original owner”. No indexation is allowed.
    • The receiver can avail the benefit of double taxation treaty and claim foreign tax credit for the taxes paid in India.
  2. US residents inherited property from parents in India
    In India

    • India does not tax inheritances at the time when such inheritances received.
    • All other rules as applicable to gifts are applies for inheritances also (i.e. capital gains taxes)

    In US:

    • Same rules for gifts, as discussed above, apply to inheritances as well.
    • The only difference is cost basis per US tax rules. The cost basis is taken to be the FMV as on the date of the death of the bequethor, for calculation of capital gains.
US tax planning: Gift Vs Inheritance:

  • The tax rules in the US make a very important distinction between property received as inheritance and that received as gift.
  • In case of property (including real estate, shares and securities etc.) received as inheritance, the basis or cost to the receiver is taken to be the fair market value as on the date of death of the bequeathor. But in case of property received as gift, the basis or cost to the receiver is taken to be the original basis of the donor.
  • This distinction becomes important at the time of sale of this property by the receiver. In order to calculate capital gains tax, the basis would be different in each case.
  • Because of this difference, US taxpayers often must weigh both options that is receiving high value property as a gift and as inheritance. For instance, in cases where the donor is of advanced age, it might be better to allow the property to be received as inheritance where the receiver will get the benefit of higher basis.