What happens if I am an NRI but invest in mutual funds using my domestic account as a domestic customer?
Some NRIs keep investing from their resident accounts unaware of the regulations around NRI taxation and investments. Whenever you spend more than 182 days living outside India in a financial year, your tax status changes to NRI. When that happens, you need to convert your existing bank accounts in India to NRO accounts. Continuing to use your existing bank accounts is not allowed as per the FEMA Act. You could also open a non-resident external (NRE) account if you plan to take your investment proceeds back to the country of your residence freely. Investments done through NRE accounts are fully repatriable.
India has signed the avoidance of Double Taxation Avoidance Agreement treaty (DTAA) with many countries. If you reside in such a country, you can claim any tax paid in India as a credit while filing your tax returns.
A long-time client approached us with this query earlier this year:
My daughter resides in the US. I would like her to inherit my assets & investments in Cochin. Would she have to pay any tax on the transfer of the value of the investments & assets?
The US levies an inheritance tax or estate tax at the time of inheritance. However, such tax is leviable only if the transferor is a citizen, resident, or green card holder of the US. In a situation where the US citizen inherits property from a person who is not a US citizen, resident, or a green card holder and also the property is not located in the US, it will not levy taxes on such inheritance.
Given the above, as a US resident, if your daughter receives a portion of your assets and investments situated in India from you, and you being an Indian resident, the US would not have any right to levy taxes on such inheritance.
However, do note that if your daughter receives any income out of such property located in India, she would have to pay taxes on it in the US. Also, note that such income is taxable in India too. Further, she could take benefit of the provisions of the India-US Double Taxation Avoidance Agreement (DTAA) to avoid paying tax on the same income twice.
One of our clients whose son has gone to Canada for higher studies had the following question:
My son left for Canada in the first week of September 2019 for higher studies and will come back to India in August 2020. So, he will be an NRI for the financial year 2019-20, as he will be out of India for more than 182 days. Which other financial institutions need to be informed of his NRI status? He holds a PAN but is not an IT assessee.
RBI, for the purpose of the Foreign Exchange Management Act (FEMA), accords special status to students going abroad for studies. They will treat as NRIs from the day of their departure from India.
Therefore, your son must intimate banks about the change in his residential status (under FEMA) before her departure. He can also update his KYC details with mutual fund houses and other financial institutions.
I had opened a Public Provident Fund (PPF) account for around 15 years before. I am an NRI now, and the account matures in 2020. If I invest the matured amount in fixed deposits, will it be taxed?
Under the PPF scheme, NRIs are not eligible to open a PPF account. However, they can contribute towards PPF in India on a non-repatriation basis until the maturity of the PPF account opened during Indian residency.
An NRI can continue to contribute towards PPF in India on a non-repatriation basis till maturity if the PPF account was opened when he/she was resident in India.
Under the income tax law, any amount received from the PPF account is exempt from tax in India, irrespective of the residential status. Once you invest the matured amount in fixed deposits in India maintained in an NRO account, the interest income from such fixed deposits will be taxable in India, subject to any relief under India’s Double Tax Avoidance Agreement with the country in which you may be a tax resident which can be availed by furnishing a tax residency certificate and other specified particulars.
I am a US resident and gifted money to my parents in India. They invested that in mutual funds in their name. Are there any tax implications for me?
Any amount received as a gift from blood relatives is not taxable in India. Any amount up to $5.6 million given as a gift is not taxable for the giver in the US.
Your parents can choose to invest this amount anywhere in India. It will not have any tax implications for you in the US. However, your parents will get taxed, according to prevalent Indian laws, for the gains they book through mutual funds. Please note that mutual fund gains are taxed only at the time of redemption in India unlike the USA, where there could be a tax on accrued gains in mutual funds as well.