Tax and Repatriation Issues on Relocation between the U. S. and India
Date: Friday , April 18, 2008
For Indians staying in the U.S. and for those who move between the two countries for various reasons have difficulties in coping with the different income tax rules followed in the two countries. In addition, the observance of different tax year patterns in the respective countries increases their woes. We will take the case of Udyan Sreenivasan, a Green Card holder, as an example at hand to explain the issues in the area of personal taxation that arise when one decides to relocate from U.S.A. to India or vice versa.
Sreenivasan decided to head home on August 31. After returning to India and glancing through the taxation edicts, he learnt to his dismay that he would have to pay taxes for this tax year both in the U.S. and in India. In other words, he is a resident of both India and the U.S. for tax purposes.
First, the Law
January 1 to December 31 constitutes a tax year in the U.S., the last date for filing returns being April 15 the next year. In the case of India, the tax year is from April 1 to March 31, with returns to be filed by July 31 the same year.
In the U.S., one is taxed on his or her world income if one is a U.S. Citizen or Green Card holder or if one is physically present in the U.S. for 31 days in a particular year and for a total of 183 days in the current and previous two years. In both cases, the taxpayer is a Resident Alien.
In India, tax liability depends upon the residential status of a taxpayer, as defined in the income tax law.
* A taxpayer is an Ordinary Resident (OR) if one stays for 183 days or more in the country in a particular taxation year. The same is the case if one stays within the country for 60 days during a year and more than 365 days during the previous four years. (For NRIs on a visit to India, the period of 60 days is replaced by 182 days). As an OR, the taxpayer is liable to be taxed on his entire world income, including the income that arises in India.
* A taxpayer is a resident-not-ordinarily-resident (RONR) if he or she has not been a resident of India for nine out of the previous 10 years, or if one’s stay in the country does not exceed 729 days during the previous seven years. As an RNOR, the taxpayer is taxed only on income that arises in India.
* If one’s stay in India is for 182 days or less, he or she is a Non Resident (NR) and is taxed only on income that arises in India.
Indian Income vs. World Income
This depends upon the source of income. If the source of income is in India, the income is Indian income. Otherwise, the income is world income. The source for salary depends upon where the services are performed; the source of the business income is where the business or part thereof is carried out; the source for interest and rent is the place where the payer or property is located; the source for dividend income is the place where the company is located.
How Does This Matter to an NRI?
If an NRI stays in India for more than 182 days, then he is a Resident of India for that year. If the NRI decides to move to India, he or she is a RNOR if:
i. The NRI’s stay in India during the preceding 7 Previous Years does not exceed 729; or
ii. The NRI was a non-resident for nine out of 10 preceding Previous Years.
As an RNOR, the NRI will not be taxed on his or her worldwide income or foreign income for two (2) years following the return to India even though the NRI was a resident for each of the two (2) years.
Sreenivasan’s Tax Liability in the U.S.
In the aforementioned case, Sreenivasan is a green card holder, so he is a U.S. Resident for tax purposes, and he is liable to file a U.S. tax return. It does not really matter whether he spent over 31 days in the current U.S. taxation year and over 183 days in the current and previous two (U.S. taxation) years. Because he is a Green Card holder, come April 2008, and the years thereafter, so long as he is a Green card holder, he would be liable to pay income tax on his worldwide income in the U.S.
Does this sound inordinately harsh? Well, there is hope. Sreenivasan can claim a Foreign Income Earned Exclusion (FEIE) up to $85,700. A Green Card holder or U.S. Citizen can claim exclusion of an amount up to $85,700 from his worldwide salary and business income. There is no exclusion for rental income, interests, dividend, profit share, and capital gain. However, before claiming FEIE, Sreenivasan has to meet the following eligibility criteria:
(i) Sreenivasan’s tax home1 must be in a foreign country; and
(ii) He must meet either the Physical Presence2 test; or the Bonafide Residence3 test.
Further, in the event that Sreenivasan pays tax in both India and the U.S. on the same income, he can claim a credit for the tax paid in accordance with the Double Taxation Avoidance Agreement between India and the U.S.
Sreenivasan’s Tax Liability in India
By the end of the current Indian taxation year on March 31st 2008, Sreenivasan would have stayed for roughly 200 days in India. This would make him a Resident for the year ended March 31st 2008. However, as an RNOR, Sreenivasan will not be taxed on his worldwide income or foreign income for two years following his return to India even though he is a resident for each of the two years. He would be taxed only on the Indian income. Therefore, irrespective of the number of days that Sreenivasan is in India for the year ended March 31st 2008, he would be taxed only on his Indian income because Sreenivasan is an RNOR.
Filing a Return of Income (ROI)
Whether Sreenivasan is taxed as an RNOR or an NR, the next question is whether he has to file an ROI. If his taxable Indian income for the year is less than the exemption limit of Rs. 1 lakh, he need not file an ROI. Also, if he has only investment income or income from long term capital gains (LTCG), the tax for which has been deducted at source, he need not file an ROI. However, if he has income form short term capital gains on equity shares or units of equity oriented mutual funds, he must file an ROI (even if such income were below the exemption limit of Rs. 1 lakh).
Never Hurts to File an ROI
The tax deduction at source for an NRI is prescribed at the maximum rate in the Income Tax Act (11% to 34%). However, the actual liability to tax for the year computed in accordance with the provisions of the Act is generally lower. The excess can be claimed as refund only if an ROI is filed.
A tax reduction of 20 percent is available in respect of investment income and 10 percent in respect of LTCG from the specified assets4 which are acquired out of foreign exchange.
The LTCG from sale of specified assets would be exempt if, within six months, the net consideration is reinvested in any specified asset and such asset is held for 3 years.
Dual Tax Status Filing
Now, come 2008, Sreenivasan could file for dual tax status as follows:
* On April 15, 2008 in the U.S.: File (Form 1040) for income till Aug. 31, ’07; and for income from Aug. 31, ’07 to Dec. 31, ’07. As Resident Aliens, he would be taxed on his world income.
* On July 31, 2008 in India: File ROI in India. As RNOR, he will be taxed on Indian income, not world income, even though stay in India exceeds 182 days.
Sreenivasan will pay U.S. income tax on the sale of his house, stock, and other assets in the U.S. as it is a U.S. source income. These assets can be repatriated to India. However, Sreenivasan will not pay any Indian wealth tax for 7 (seven) years for assets brought to India on return and 1 year after his return.
Also, here is a checklist of things for Sreenivasan to do when he gets back to India:
* Redesignate banking accounts as resident accounts
* Maintain FCNR accounts till maturity
* RFC accounts –
* denominated in forex;
* funds are fully repatriable
* interest is tax exempt till the account holder is an NR and/or an RNOR
* Inform the companies and depository participants of the change of resident status.
Moving from India to the U.S.
No RBI permission is required for repatriation of up to $1 million a year for sale proceeds from immovable property held for more than 10 years, and for inheritance, medical, and educational expenses. Also, current income viz rents, dividends, and interest are fully repatriable. However, special permission on the ground of hardship is required from the RBI for deposits with banks or companies, P.F. and S.A., Life Insurance Maturity proceeds or claims, and sale proceeds of shares and securities.