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Residence and domicile
How is residence/domicile determined for tax liability purposes in your jurisdiction?
As per the Income Tax Act 1961 an individual is said to be an Indian tax resident in a given financial year (April 1 to March 31) if he or she satisfies either of the following conditions:
- He or she is in India for 182 days or more in that financial year; or
- He or she was in India for 365 days or more during the four years preceding the financial year and is in India for 60 days or more in that financial year.
However, the Income Tax Act provides for specific instances wherein the 60-day threshold is increased to 182 days for the purposes of the second condition above. This increased threshold applies when the individual is:
- an Indian citizen and leaves India in any previous year for the purposes of employment outside India; or
- either an Indian citizen or a ‘person of Indian origin’ living outside India who comes for a visit in India in any previous year. An individual is a person of Indian origin if he or she, or either of his or her parents or grandparents, was born in undivided India.
The concept of domicile/citizenship is not relevant for tax purposes. Instead, the Income Tax Act uses specific categories – ‘residents’ (taxed on their global income), ‘residents but not ordinary residents’ and ‘non-residents’ (both taxed on income sourced in India).
Describe the income tax regime in your jurisdiction (including tax base, rates, filing formalities and any exemptions, reliefs or deductions).
India follows a scheduler system of taxation, whereby income is categorised as:
- business income;
- capital gains;
- income from residential property; or
- income from other sources.
The corporate tax rate is 30% (reduced rates apply to limited cases), and individuals are subject to progressive slab rates – the highest being 30% (additional surcharge and cess applicable). A separate scheme of tax applies to capital gains and dividends.
An imputational system applies to tax dividends, whereby the company declaring the dividends is subject to a tax at 20.36% (effective rate applying a gross-up basis). Shareholders receiving such dividend are subject to no further tax other than non-corporate, resident shareholders who are subject to a 10% tax on aggregate dividends received above Rs1 million.
Residents (companies and individuals) are taxed on their worldwide income with necessary credit, subject to the satisfaction of certain conditions for foreign taxes paid. Non-residents are taxed in India on their income sourced in India. Importantly, India has entered into several double taxation avoidance agreements that apply to the extent that it is beneficial to the taxpayer.
Detailed, comprehensive provisions exist regarding reliefs and deductions for providing incentives to specific industries (eg, manufacturing incentives, special economic zones), as well as businesses (eg, depreciation, adjustments for foreign exchange fluctuations and indexation, amortisation).
In terms of compliances, taxpayers must file their income tax return annually, and obtain a permanent account number.
Describe the capital gains tax regime in your jurisdiction (including tax base, rates, filing formalities and any exemptions, reliefs or deductions).
In order to incentivise capital import, capital gains on sale of assets in some cases are accorded a lower tax rate. The determining factors for the rate depends on the period of holding, the nature of the asset and the seller.
Period of holding
Listed equity shares held for one year or less are treated as short-term assets, others are treated as long-term assets. However, unlisted shares and immoveable assets are short-term assets if they are held for two years or less, and long-term assets if they are held for more than two years. For all other assets, the period of holding is three years.
The table below summarises the applicable tax rates (additional surcharge and cess may apply).
Listed shares sold on-market on or before March 31 2018 (ie, on the floor of the stock exchange) where a securities transaction tax (STT) is paid both at the time of acquisition and sale of the shares
Listed shares sold off-market
10% (without indexation)/ 20%
Non-residents, however, are subject to a 10% rate on the long-term capital gains arising from the sale of unlisted shares, whereas short-term capital gains are taxed at the rate of 30% (individuals) or 40% (corporates) on the sale of the asset.
The recent Finance Bill 2018, announced by the Finance Minister on February 1 2018, proposes a new capital gains tax regime effective April 1 2018 for the sale of listed shares (among some other capital assets). A 10% tax will apply on long-term capital gains arising from the sale of assets above Rs100,000 provided that STT was paid at the time of acquisition of the shares. The proposal prescribes a formula for ascertaining the cost of acquisition and provides a limited grandfathering whereby a step-up in basis shall be provided as of January 31 2018.
The Income Tax Act provides beneficial provisions, whereby individuals reinvesting long-term capital gains from the sale of residential property, subject to the satisfaction of certain conditions.
Inheritance and lifetime gifts
Describe the inheritance and gift tax regime in your jurisdiction (including tax base, rates, filing formalities and any exemptions, reliefs or deductions).
There is no inheritance or gift tax in India. The estate duty and gift tax legislations were abolished in 1985 and 1998 respectively, due to both their ineffectiveness in achieving their purpose and rising administrative costs.
What taxes apply to individuals’ acquisition and disposal of real estate in your jurisdiction?
Real estate may be held as an investment (capital asset) or as stock-in-trade (business asset). Depending on the characterisation of income and the length of time for which the real estate is held in case of a capital asset, either a 20% (long term) or a 30% tax rate shall apply to resident taxpayers. Further, in case of individuals, certain roll-over benefits may apply in case of long-term capital gains.
Exchange controls restrict the Indian real estate held by individuals. For instance, non-resident Indians (NRI) and foreign nationals cannot hold or acquire agricultural land (unless inherited). Similarly, an NRI cannot undertake real estate business in India.
Additionally, each state in India levies stamp duties on the transfer and conveyance of real estate. Certain concessions are accorded in some states if gifts are made among family members.
Non-real estate assets
Do any taxes apply to the acquisition and disposal of other assets apart from real estate?
Yes, if the moveable asset is held as investment, then capital gains tax shall apply. Alternatively, such sale or disposal may be taxed as business income or income from other sources. In the latter case, the recipient is taxed at 30% where inadequate or no consideration has been paid.
Further, stamp duties are applicable based on local legislation and the nature of the asset sold.
Other applicable tax regimes
Are any other direct or indirect tax regimes relevant to individuals?
The Goods and Services Tax Act (in force since July 1 2017) has replaced erstwhile indirect taxation laws. The comprehensive goods and services tax system provides for the taxation of services, and goods consumed and provided/sold by individuals as specified therein.
Are there any special tax planning considerations for individuals with a link to your jurisdiction?
An individual’s taxes can be planned in a legally compliant and efficient manner using various structures. Some of these include:
- Trusts – creating irrevocable and discretionary private family trusts for relatives to protect personal wealth from liabilities, and to ensure a smooth mechanism for the inter-generational transfer of assets. Similarly, setting up public charitable trusts that are exempt from income tax for undertaking philanthropy. Further, offshore trusts may also be set up to ensure that high net worth individuals (HNIs) have an offshore asset base.
- Lifetime gifts – executing gift deeds of real estate during the lifetime of the HNI to avail the lower stamp duties applicable in some states.
- Residential status – availing the benefits of remittance offered to Indian residents and NRIs both from an exchange control and tax perspective. For instance, an Indian resident may repatriate Indian funds up to $250,000 in a financial year (April 1 to March 31). Upon migration and converting their Indian resident accounts to NRI accounts, they could thereafter repatriate up to $1 million as capital. Therefore, considerable pre-immigration planning may be undertaken.
- Roll-over benefits – individuals may reinvest their long-term capital gains in real estate, subject to applicable conditions to avail exemptions.
- Hindu undivided families (HUF) – drawing from customary Hindu law, traditionally families have structured their assets and wealth in HUF entities that act as pooled vehicles for investments.
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