I am a 70-year-old US citizen of Indian origin, holding a US passport and having an overseas citizen of India stamp on the passport. I am settled in India since mid-2011. I visit the US regularly, but I am classified as “resident" for tax purposes in India. I have been declaring the social security payment and government pension I get. Both incomes are offered but not taxed under the Double Tax Avoidance Agreement (DTAA). I also have an IRA (individual retirement account) in the US. Overall, I made some capital gains in the IRA. How do I treat the capital gains for taxes in India? Are they taxable as most of the funds remain within the IRA, though some had to be withdrawn? How do I claim refund, if any, in India under DTAA?
—Name withheld on request
If you qualify as “resident and ordinarily resident" in India, your global income is taxable in India. Accordingly, any income earned in your IRA account (including capital gains) in the US is also taxable in India. Interest and dividend incomes will also be taxable in India.
Realized gains on sale of shares and mutual funds outside India in the IRA account will be taxable as capital gains in India. Capital gain is taxable as the difference between sale consideration less cost of acquisition less cost of transfer. Unrealized gains or losses are not taxable in India.
Shares of overseas companies are classified as long term if they are held for more than 24 months. Whereas, overseas mutual funds are classified as long term if they are held for more than 36 months. Long-term capital gains (LTCG) is taxed at 20% plus applicable surcharge and education cess, with the benefit of indexation on the cost of acquisition. Short-term capital gains (STCG) is taxable at applicable slab rates plus surcharge and education cess. Subject to specified conditions, LTCG can be claimed as exempt from tax to the extent it is reinvested in one residential house in India (to be either purchased within one year before or two years after or constructed within three years of transfer of the long term capital asset). But the condition is that the taxpayer should not be owning more than one house (other than the house on which reinvestment benefit is to be claimed) on the date LTCG arises and there are also certain restrictions on the sale of the new house bought. If capital gains are not invested until the due date of filing of tax return in India (i.e., 31 July), you may deposit the amount of capital gains in a Capital Gain Account Scheme (CGAS) with a bank (not later than the due date of filing returns), and subsequently withdraw this amount for reinvestment. If the entire amount is not reinvested or deposited in CGAS, the remaining portion of the gains will be taxable.
Tax on LTCG or STCG can be either paid by way of advance tax in four instalments or before filing tax returns along with interest by 31 July.
The above tax position is as per domestic income tax law of India before application of provisions of India-US DTAA. Under the DTAA, you will need to determine whether you qualify as “resident" of India or “resident" of US as per Article 4 of the DTAA. If you qualify as “resident" of India, you are entitled to credit of taxes paid in the US against Indian tax liability on US incomes on which US has the right to levy tax as per DTAA. Since you are a citizen of the US, that country has the right to tax you without considering the provisions of DTAA (subject to certain exceptions).
However, if you qualify as “resident" of the US as per Article 4 of the DTAA, interest and dividend incomes arising in the US may not be taxable in India under Article 23 of the DTAA. Also, capital gains arising in the US can be taxed in India as per Indian domestic tax laws as discussed above. Given the complexity involved and in the absence of actual facts, it is important that you seek professional advice.
Sonu Iyer is tax partner and people advisory services leader, EY India. Queries at firstname.lastname@example.org