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Tips for NRIs-Taxation, Wealth & Estate Planning

Tips for NRIs-Taxation, Wealth & Estate Planning

NRI Definition

As per Indian Income Tax:

An NRI's income taxes in India will depend upon his residential status for the year (April-March) as per the income tax rules mentioned below. If your status is 'resident', your global income is taxable in India. If your status is 'NRI,' your income earned or accrued in India is taxable in India. There is difference between residential status and citizenship. A person may be national/citizen of India in a previous year and at the same time he may not be an Indian resident or vice-versa.

Non Resident Indian (NRI) is a person who is not a resident of India.

An individual is a resident if has resided in India in that year for 182 days or more.

However from 2021, this has been complicated with changes made in Section 6(6) (d) as under:

An individual shall be deemed to be resident but not ordinarily resident in India, if he satisfies the following 3 conditions:

(i) He is an Indian Citizen or a person of India Origin;

(ii) His total income (other than the income from foreign sources) exceeds Rs.15,00,000/-the relevant year; and

He comes to India on a visit during the relevant previous year; and he is in India for 120 days or more (but less than 182 days) during the relevant year and 365 days+ in 4 prior years Thus, for those NRIs who have local Indian of Rs.15+ lakhs it is advisable to not to take POI status if they have to stay in India for above 120 days but up to 182 days and it is critical to limit their stay in a year (April-March) below 182 days. Once you cross 182 days, your foreign income will be taxed in India as you would be treated as “Resident” under Indian Tax Laws even if you not citizen of India.

For those NRIs having local Indian income below Rs.15 lakh, your stay should be restricted up to 182 days.

Once you stay above 182 days all your foreign income (including your Pension) will become taxable in India. Off course, you will get tax credits for the federal taxes that you have paid on that income

NRIs as per Foreign exchange regulations:

Non-Resident Indian (NRI) as per FEMA or Foreign Exchange Management Act (Regulator RBI) is a person who has gone out of India or stays outside the country for the purpose of employment, business, vocation (occupation for which an individual is trained) or any other circumstances indicating his/her intention to stay outside India for an uncertain period of time (job or assignments where you don’t know when you will return to India). Who is person of India origin?

A person of Indian origin (PIO) was a form of identification means a foreign citizen (except a national of Pakistan, Afghanistan, Bangladesh, China, Iran, Bhutan, Sri Lanka and/or Nepal), who:

· at any time held an Indian passport (but not currently) or

· either of their parents/grandparents/great-grandparents were born and permanently resident in India as defined in Government of India Act, 1935 and other territories that became part of India thereafter provided neither was at any time a citizen of any of the aforesaid countries (as referred above) or

· Is a spouse of a citizen of India or a PIO?

PM Narendra Modi announced on 28 September 2014 that PIO and OCI cards would be merged. On 9 January 2015, the Person of Indian Origin Card scheme was withdrawn by the Government of India and was merged with the Overseas Citizen of India card scheme. PIO cardholders must apply to convert their existing cards into OCI cards. The Bureau of Immigration stated that it would continue to accept the old PIO cards as valid travel documents until 31 December 2022.

Overseas Citizenship of India (OCI)

After multiple efforts by leaders across the Indian political spectrum, a pseudo-citizenship scheme was established, the "Overseas Citizenship of India", commonly referred to as the OCI card. The Constitution of India does not permit full dual citizenship. The OCI card is effectively a long-term visa, with restrictions on voting rights and government jobs. The card is available to certain Overseas Indians, and while it affords holders residency and other rights, it does have restrictions, and is not considered to be any type of Indian citizenship from a constitutional perspective.

The following chart highlights the tax incidence in case of different persons:

Nature of income Residential status

Nature of income

ROR

RNOR

NR

Income which accrues or arises in India

Taxed

Taxed

Taxed

Income which is deemed to accrue or arise in India

Taxed

Taxed

Taxed

Income which is received in India

Taxed

Taxed

Taxed

Income which is deemed to be received in India

Taxed

Taxed

Taxed

Income accruing outside India from a business controlled from India or from a profession set up in India

Taxed

Taxed

Not Taxed

Income other than above (i.e., income which has no relation with India)

Taxed

Not Taxed

Not Taxed


ROR means resident and ordinarily resident.

RNOR means resident but not ordinarily resident.

NR means non-resident.

Tax Planning Tips, Ideas

HUF, NRI & US Taxation

The Hindu Undivided Family has its roots in the ancient Hindu law like the Manu Smriti.This paper is an overview of the Hindu Undivided Family (HUF)—a legal entity embedded in tax, corporate governance and state codification of Hindu personal law in India.

Background

A Hindu Undivided Family (“HUF”) is a special feature of Hindu society, which today consists of a common ancestor and all of that common ancestor’s lineal descendants together with their spouses and unmarried children. Prior to the amendments to the Hindu Succession Act, 1956 in 2005, only sons could be coparceners, but since then a HUF includes all family members who are Hindus by religion, i.e. sons and daughters whether married or unmarried are now part of HUF. The Karta is the manager of the family. Traditionally, the Karta was usually the most senior male. In light of the legal changes enacted in 2005, females can now not only be co-parceners but also Karta’s. The Karta has the power to transfer for value the joint family property thus binding all of the coparceners in the property if such transfer is made for legal necessity or for the benefit of the family (i.e. payment of debts for family business). The HUF can pay valid remuneration to the Karta under a valid bonafide agreement for the benefit of the family. Only joint family property can fund a HUF. Joint family property includes: (i) “Ancestral Property” (as defined below), (ii) property from a partition of a larger HLJF, (iii) property that is acquired with HUF assets, and (iv) separate property that is contributed by a member (although the Indian tax benefits of a HUF described below do not apply to such separate property). Ancestral property includes any property received by a Hindu male from his father, paternal grandfather or paternal great grandfather. If a Hindu male dies intestate, then the share received by his son is impressed with the character of HUF property in the son’s hands i.e. the wife and children of the son will also have a per capita share in that part of the property. If property is received as a gift or under a Will with a clear direction that it is to be made to the HUF, then it will be so regarded.

How does a HUF come into existence?

HUF is purely a creature of law and cannot be created by an act of parties (except in case of adoption and reunion). A HUF is a fluctuating body, its size increases with birth of a member in the family and decreases on death of a member of the family. The most frequently asked question about HUF is: How does it come into being? To form an HUF, all you have to do is Get Married. The HUF gets created as soon as you complete the seven (or four, whatever) circles round the holy fire and become Man and Wife. There have to be a minimum of 2 people to constitute a family. The husband and wife together make up a family. They don't have to wait till they have a baby to constitute their HUF. Every Hindu becomes a member (Coparcener) of an HUF the moment he/she ejects out of her mother's womb, mode of delivery--C-section or Normal--notwithstanding. A HUF consists of Karta, all the sons and daughters are referred to as Coparceners and wife is a member.

Till the time the HUF has an empty kitty, it is like a balloon that no one has yet blown air into. A balloon can rightfully be called a "ball"oon only when it swells up with air inside it. Without the air the balloon is inert, dormant. An HUF too is inert and dormant without funds.

The million-dollar question indeed is: How to blow funds into the HUF and turn it into a balloon that floats?

A member of the HUF throwing his money into the common pool, or to use that overused cliché' the family hotchpotch, is out of the question, thanks to Section 64(2) which would tax the income earned by the HUF on that money in the individual member's hands only.

But the clubbing provisions can be avoided if the HUF invests the money in instruments yielding tax-free income. The tax-free income can then be reinvested to earn even taxable income as income on income is out of the clubbing provisions.

Strangers can make gifts but only up to Rs 50,000 (Section 56). A way-out is to receive gifts from members of bigger HUFs, who though your relatives, aren't members of your smaller HUF. A father may make a gift of money to his son's newly-created HUF, clearly specifying in the Gift Deed that the gift is to his son's smaller HUF and not to the son himself. This will keep both Section 64(2) and Section 56(2) at bay.

After the HUF has a nucleus of its own and gets going, care has to be taken to keep the HUF's affairs completely distinct from the individual members' affairs. Where the members of the HUF carry on their individual businesses, as they normally do, the distinction between what constitutes the individual's income and what is HUF's income may get blurred.

HUF funds and the affairs of the HUF are completely differs from one’s own affairs. One can do his/her business/job freely while having the member of HUF. But HUF income and individual income are different and to be taxed differently.

HUF's are allowed to open Savings Bank Account although it`s a non-Individual entity.

So to have capital in HUF account we should take following steps.

1. Have a HUF Formation Deed. (Banks in India have their own format for this hence check with your bank)

2. Have a Gift Deed for receiving funds-Inheritance, Gifts from “Relatives” other than members of this HUF or assets or property from parents.

3. Apply for permanent account number (PAN) in the name of HUF. You require Rubber stamp of HUF.

4. We should have opened a bank account.

NRI & HUF

A HUF, whose management, superintendence and control are exercised wholly from within India during the financial year, would be a “Resident”. From a tax point of view, if it can be shown that all decisions concerning the affairs of the HUF were taken with in India during the relevant year, that HUF will enjoy all benefits also available to a resident individual and the many tax exemptions. A Karta of an HUF can be a non-resident (provided he is a Hindu). However, the residential status of HUF would be Resident under the Income-Tax Act, 1961. An HUF is said to be resident in India if control and management of its affairs is wholly or partly situated in India. The mere fact of absence of Karta from India does not make the family (HUF) a non-resident (unless the decisions concerning the family are taken outside India). HUF can & should give Power of Attorney to any close relative in India.

Partition of HUF

Every coparcener, including sons and daughters (the latter as of 2005) and grandchildren, has a right to ask for partition of the property, which has to be a total partition. A total partition occurs when all properties of the family are divided among the members, and upon such a partition, the HUF ceases to exist. Partial partition would not be approved.

HUF's Indian Income & IRS

Tax Treatment of HUF Income in USA: For determining the U.S. tax consequences of a HUF, one has to understand whether HUF will be treated as a separate entity or whether it would be compared to a grantor trust under which the person who is viewed as grantor of the property or the person who controls the property (here the Karta) would he considered the owner of the property for United States income tax purposes. Considering HUF’s structure the IRS will treat a HUF as a separate entity since the Karta cannot be a donor to a HUF and the role of the Karta bears very strong resemblance to the fiduciary responsibilities of a trustee.

Precautions while drafting a Will when beneficiary/ies are NRIs

1. Parents are advised that they should provide as much more details as possible in the Will itself so that their NRI children face minimum hassles to claim the inheritance.

2. Clear division of wealth among children/dependent family members

3. If you want to do philanthropy, you should mention the NGO's name or person you wish to donate to and define the quantum/amount of donation

4. The witness should not be the beneficiaries of the Will.

5. Identifying the executor/s of Will

6. Parents should share the location of the Will document with the executor as well as the NRI children so that the same can be accessed by them easily.

Wealth Planning for Indian Assets for NRIs

Wealth Planning is a personalised process focused on developing a roadmap to help you build, protect, and transition your wealth by looking at all areas of your financial life including retirement, tax, legacy etc. Financial planning is the process of developing a personal roadmap for your financial wellbeing. The general perception of financial planning is managing one's money. It is widely considered as just managing cash flow and wealth management.

Wealth planning has a far broader ambit. The focus is NOT creation of wealth; rather it deals with every aspect of HOW to preserve wealth. The aim of Wealth Planning is:

· Protecting the wealth and value of all assets - including life;

· Avoiding tax leakage by making all our financial transactions tax-efficient; and

· Passing on the assets we created to the successor of our choice, and therefore ensuring that our wish is duly implemented.

All of the above go hand-in-hand with achieving our goals - while we are living and after us, all in a systematic manner. This is the true essence of wealth creation and progression.

Financial planning

Financial planning is the process of developing a personal roadmap for your financial wellbeing. To draw an outline for your financial planning, you need to make a clear, realistic assessment of your needs.

Different Asset Classes for Investing

Making smart investments can help you generate income by putting your money to work. While you may work hard to earn money, it may not always be enough to fulfill your dreams and goals. People often get confused between savings and investments, which play different roles in your personal financial planning. Risk appetite is the amount of risk you can take on your investment. It is the point till which you feel that you should remain invested in an asset class because still in the long run you will be rewarded finally. It’s a personal thing, there is nothing like good or bad investment. It’s a subjective matter. Risk and returns are always proportional. Normally people choose a product which matches there return expectation and then compromise with the risk and then later on when there is loss more then there risk appetite, they cry.


Insurance @ Wealth & Retirement Planning Tool

Insurance plans are meant to manage the life contingency risk first before extending their reach to cater to other life goals. A lot of financial goals of a household can be adequately covered by way of insurance plans. Amount of Insurance will be equivalent of gap in your Corpus that means Total Funds required as Gross Corpus to meet recurring expenses and all wish list at current cost minus available assets.

Retirement Planning: Retirement is a process for which one has to have a proper approach and plan from all aspects. As quality of life becomes better and with advances in medical technology, there is a high chance that you may outlive your retirement savings. Old age is a pleasure and should be enjoyed without the fear of disease and death. Post Retirement is the most important phase of every person as it gives freedom to lead your life in a relaxed atmosphere, follow passion and explore life. Many NRIs seeks to spend some part of their life in India due to consideration of extreme weather, social life, religious activities & cost of living.

Estate Planning for Indian Assets by NRIs

Estate planning is the process of figuring out who manages your assets in the event of your incapacitation or demise. It is a combo of financial and succession planning. It is done in consultation with experts who specialises in estate and tax law. The estate is the sum total of your movable and immovable assets. Estate Planning makes provisions for estate management, estate preservation and creating a legacy for the estate. It is done with the same intent as succession planning - least disruption in transfer and minimal tax liability. Estate planning can be done in one of several ways – through nomination, wills or trusts or a combination of all.

NRIs and inherited property

Documents required for transfer the title of inherited property:

1. Original purchase deed and registration documents

2. Reckoner or Circle rate valuation as on 1st April, 2001 for Property bought by your parents prior to 2001

3. Nomination

4. Will (Suggest to get the property in your HUF)

5. Family Arrangement or Family Settlement Deed

6. Probate (If Property is situated in Maharashtra, Tamilnadu & West Bengal)

7. Succession certificate (In absence of a Will)

8. No Encumbrance certificate

9. Land & title related documents (such as 7/12 extract, Khata, property registration document,

10. Registered Power of Attorney (POA)

Ancestral Property & Complications

Why should inherited Property be received in your HUF instead of in your individual name?

When NRI sells the inherited property if it has been inherited in individual name, then NRI pays Long Term Capital Gains Taxes @ 20.8%. The buyer of the property would withhold TDS @ 20% (of sale value) as seller is a NRI and NRI would have to file Tax Return to claim the refund of excess TDS deducted. LTCG is worked out by reducing Indexed Cost (adjusting for Inflation) from Sale value. If property is bought by your parent prior to 2001, then you have to take Fair value as on 1st April, 2001 which can be obtained from Reckoner or Circle rate valuation. At the same time, NRI has to offer this Income for taxation purpose in the place where they are currently located. The value of Capital Gain that NRI has to offer for taxation would be based on local tax laws and you have to ascertain whether you would get indexation (adjusting for Inflation) benefits and whether you would get Tax Credit as you would have paid special concessional taxes (20.8%).

Instead, it is recommended that Inherited Property should be received in NRI’s HUF (based in India) and when this inherited property is sold, HUF would pay LTCG (as indicated in previous paragraph). Since HUF is a separate & distinct entity based out of India, most probably this LTCG may not be clubbed with NRI’s income in their country of residence. However NRI is advised to reconfirm this with their local tax expert like CPA or Tax Attorney. The buyer of the property would withhold TDS @ 1% (of sale value) as seller is a resident entity (HUF).

NRI & PROPERTY SALE ON POWER OF ATTORNEY

GPA will not be valid unless it`s a Registered PoA. No property sale on power of attorney: As per Supreme Court of India.

NRIs & Benami Property in India

Tax implications on sale of Indian properties and transfer of funds to USA

Selling a Property by Non-Resident require lot more ground work to be carried out as explained above.

NRI’s and TDS on Property Sale

As per Section 195 of Income Tax Act 1961, when a NRI sells a property, the buyer is liable to deduct TDS @ 20% of the Sale value whereas Tax on LTCG (after adjusting cost of acquisition to the inflation) is 20.8% and thus you have file Tax Return to seek refund of excess TDS. This takes time period of 6-12 months. After you receive the Tax refund, Income Tax department would also give you interest @ 9% p.a. and Income Tax Dept. would deduct TDS @ 20% from the interest. Thus NRI has to file Tax Returns for next 1-2 years due to this TDS on interest.

Foreign Exchange & Remittances for NRIs

NRI can receive remittances for 2 reasons:

1. Sale proceeds from sale of Property. Annual limit is US $ 1.00 million

2. Liberalised Remittance Scheme (LRS) of USD 2, 50,000 for resident individuals. Under the LRS, Authorised Dealers may freely allow remittances by resident individuals up to USD 2, 50,000 per Financial Year (April-March) for any permitted transactions such as gift/donation, maintenance of close relatives abroad, medical treatment abroad; studies abroad etc. The Scheme is not available to corporates, partnership firms, HUF, Trusts, etc.

TCS on overseas Remittances @ 1%

You require certificate issued by a Chartered Accountant in Forms 15CA & 15CB (if remittance exceeds Rs.5 lakhs)


Estate Planning Road map

Estate planning is not an option but a necessity for a person who wants to ensure that assets and passed on the his/her loved ones in such manner as he/she desires without compromising on the efficiency of such process. An estate plan aims to preserve the maximum amount of wealth possible for beneficiaries and flexibility for the individual prior to his death. One of the goals of succession planning is to protect the interest of an individual during his/her lifetime and after his/her death safeguard the interest of his/her loved ones. This can be achieved by different ways of estate planning by distributing assets among his beneficiaries post his death. An estate plan aims to preserve the maximum amount of wealth possible for beneficiaries and flexibility for the individual prior to his death.


Will: Powerful estate planning tool

A Will is the most practical first step in estate planning. It is a legal declaration of the intention of a person regarding assets that the individual desires to take effect after his or her death. It is an extremely personal document and showcases an individual's love, care, opinions and feelings towards loved ones.

Make separate Will for all Indian Assets

Drafting your Will considering NRI children in mind

Initially one needs to start with the collation of the data of assets, details like Folio numbers, joint or single holding, nomination, details of asset, broad details etc. Parents should share broad details about bank accounts, investments, FDs, mutual funds, holdings in Demat accounts and other investments, private company shares, Pension Fund, Provident Fund, Insurance location of the lockers, properties, and all the important documents etc. Add details like which bank/institution and branch address where you hold the account or locker, etc., and their identification number. If you have assets such as art & artefacts, the same should be identified. The Will should clearly define the division of assets and liabilities. In the case of a minor, there should be a clause for the appointment of a guardian. And in the end, to deal with any asset that gets left out, ensure to add in a residuary clause. If you want to do philanthropy, you should mention the organisation's name or person you wish to donate to and define the quantum/amount of donation. Identify the executor of Will who should be young age and reliable. you should share the location of the will document with the executor as well as the NRI children so that the same can be accessed by them easily. We work hard to earn for ourselves and our loved ones, a will ensures they get their rightful share after us.

Inheritance (Estate Duty) Tax Likely

Gift Taxability under Section 56 2(VII)


CA Harshad Shah, harshadshah1953@yahoo.com



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