1. Which factors bring an individual within the scope of tax on income and capital gains?
The Income Tax Act, 1961 ("ITA") levies tax on income and capital gains. The general rule contained in the ITA is that Indian residents are taxable on their worldwide income and non-residents are taxable only on Indian sourced income. Accordingly, two factors which bring a taxpayer within the scope of Indian tax are, residence of the taxpayer and the location of the sources of his income:
Taxable individuals are divided into three categories based on their residential status i.e. (i) resident and ordinarily resident; (ii) resident but not ordinarily resident ("RNoR"); and (iii) non-resident. Residential status is generally determined based on an individual's physical presence in India without having regard to the individual's intention to reside in India, domicile or citizenship in a given year. The Indian financial year extends from April 1st to March 31st.
(i) An individual is a 'resident' if: (i) he is present in India for 182 days or more in a financial year; or (ii) he is present in India for 60 days or more in a financial year and at least for 365 days during 4 years immediately preceding the relevant financial year. In case of the following individuals the above mentioned 60 day period is relaxed to 182 days:
- li> an Indian citizen leaving India for employment outside India;
- an Indian citizen residing outside India visiting India for more than 60 days in the relevant financial year; and
- person of Indian origin visiting India for more than 60 days in the relevant financial year.
(ii) An individual is an RNoR i.e. transitioning from a non-resident to a resident if: (i) he is a resident in India in the relevant financial year; and (ii) he is either a non-resident in 9 out of the 10 years preceding the relevant financial year, or he is present in India for 729 days or less during the 7 years preceding the relevant financial year.
(iii) In any other case an individual is a non-resident.
Residents, non-residents and RNoRs are taxed on Indian-source income. Residents are also taxed on their worldwide income. RNoRs are taxable on foreign income only if such income is derived from a business or a profession set up in India.
(b) Source of income:
Income that is directly or indirectly sourced in India is taxable in India. Source rules differ for different kinds of income. For example, income arising from capital gains is considered to have an Indian source if it arises from the transfer of a capital asset situated in India. A non-Indian capital asset may yet be considered to be situated in India if it is a share or interest in a non-Indian incorporated company or entity which derives, directly or indirectly, its value substantially from the assets located in India.
2. What are the taxes and rates of tax to which an individual is subject in respect of income and capital gains and, in relation to those taxes, when does the tax year start and end, and when must tax returns be submitted and tax paid?
Please note all the tax rates provided below are exclusive of surcharge and cess. The income of an individual is taxed at progressive slab rates that range from 0% to 30%, with the highest slab applying to individuals who have income in excess of INR 1,000,000. Tax slabs also differ based on the age and gender of the individual and different rates may be applicable to entities. For the purposes of charging income tax, an individual's total income is classified into five categories of income i.e. (i) salaries, (ii) income from house property, (iii) business income, (iv) capital gains and (v) income from other sources. Individuals are subject to a surcharge ranging from 10% to 37% based on their total income tax payable. Additionally, an individual is also subject to a health an education cess of 4% over the income tax and surcharge.
Capital gains tax rates range from 0% to 40%, depending on the residency status of the seller, the nature of seller (individual or otherwise), the type of asset and the period of holding. Assets which are considered "long term capital assets" are eligible to a lower rate of capital gains tax. The eligibility period for an asset to be considered a long term capital asset varies from asset to asset. India does not levy an expatriation tax or exit tax.
An individual with taxable income is to pay tax and submit tax returns at the end of the tax year by July 31st, although the dates are occasionally extended.
3. Are withholding taxes relevant to individuals and, if so, how, in what circumstances and at what rates do they apply?
Yes, withholding taxes are relevant to individuals. The table below highlights some examples of the withholding tax rates1(exclusive of surcharge and cess) applicable:
|Nature of Income||Non- resident||Resident|
|Salaries||The average rate of income-tax computed on the basis of the slab rates in force, with respect to the estimated salary income.||Same as non-resident|
|Dividends||If payment is made by a domestic company: no withholding tax but a final dividend distribution tax of 15% is imposed. However the effective rate of this tax is about 21%.||Same as non-resident|
|Royalties||10%||If aggregate payment (exceeding INR 30,000) is made by a person not being an individual or a Hindu undivided family: 10%|
|Fees for technical service||Same as Royalties||Same as Royalties|
|Long term capital gains||0% – 20% (depending on the kind of asset and seller)||–|
|Short term capital gains||0% – 40% (depending on the kind of asset and seller)||–|
Please note other payments may also be subject to withholding tax.
4. Is there a wealth tax and, if so, which factors bring an individual within the scope of that tax, at what rate or rates is it charged, and when must tax returns be submitted and tax paid?
Currently, India does not impose wealth tax. The erstwhile Wealth Tax Act, 1957 imposed 1% tax on the net wealth exceeding INR 3 million of an individual. However, this tax was abolished by the Finance Act, 2015.
5. Is tax charged on death or on gifts by individuals and, if so, which factors cause the tax to apply, when must a tax return be submitted, and at what rate, by whom and when must the tax be paid?
Currently, India does not impose any inheritance tax or estate duty tax. The Estate Duty Act, 1953 imposed estate duty tax. However it was repealed in 1985. There are reports that the Government is looking to reintroduce an estate/ inheritance tax.
Gift taxes are imposed by the ITA under the residuary income category, "income from other sources". Certain specified intra-relative transfers are currently exempt from such tax. With respect to gifts between non-relatives, tax is levied on the receipt of the following:
(a) Any sum of money which exceeds INR 50,000;
(b) Any immovable property where the reckoner value of the property exceeds INR 50,000; and
(c) Any other property where the fair market value of the property exceeds INR 50,000.
The recipient of such sum or property is liable to pay the tax based on his/her individual slab rates. It is also relevant to note that these provisions taxing "deemed gifts" are not applicable to money or property received under a will, by way of inheritance, etc.
6. Are tax reliefs available on gifts (either during the donor's lifetime or on death) to a spouse, civil partner, or to any other relation, or of particular kinds of assets (e.g. business or agricultural assets), and how do any such reliefs apply?
Please see our response to Question 5 above.
7. Do the tax laws encourage gifts (either during the donor's lifetime or on death) to a charity, public foundation or similar entity, and how do the relevant tax rules apply?
Yes, the Indian tax regime provides deductions in the hands of the donor provided the donation is made to a registered tax exempt entity under the ITA. An entity is eligible to be registered as a tax exempt entity provided it is established in India for charitable purposes and complies with requirements specified by law. It may be noted that such entity would not qualify to be established for "charitable purpose" if its purpose is wholly or substantially of a religious nature or expressed to be for the benefit of a particular religious community or caste. The aggregate sum of donations to certain tax exempt entities which are subject to deductions in the hands of the donor is capped at 10% of the gross total income of the donor.
8. How is real property situated in the jurisdiction taxed, in particular where it is owned by an individual who has no connection with the jurisdiction other than ownership of property there?
Income from real property is taxed at the applicable slab rates of an individual under the category "income from house property". This tax is applicable to individuals irrespective of their residency status in India. It is important to highlight that owners are taxed on actual rentals as well as notional rentals (if the property is not actually rented). Up to two residential properties are exempt from tax.
9. Are taxes other than those described above imposed on individuals and, if so, how do they apply?
In the private client context, individuals are required to pay stamp duty on instruments of transfer. Stamp taxes on transfer of real estate are frequently significant; the rates depend on the location of the property, as this tax is levied at the state level. Several states such as Maharashtra, Karnataka and Rajasthan provide lower stamp rates for intra-relative transfers. With respect to transfer of securities, currently only the transfer of physical shares is stampable. However, effective from January 9, 2020, the Finance Act, 2019 has amended the Indian Stamp Act, 1899 and imposes stamp duty on dematerialised securities as well as rationalise the rates at which securities are stampable.
10. Is there an advantageous tax regime for individuals who have recently arrived in or are only partially connected with the jurisdiction?
Yes. Please see our response to Question 1 above in this regard.
11. What steps might an individual be advised to consider before establishing residence in (or becoming otherwise connected for tax purposes with) the jurisdiction?
It may be relevant for the individual to first evaluate the application of Indian exchange control regulations for example, repatriation requirements, remittance restrictions, etc. A person resident in India is permitted to hold, transfer or invest in foreign currency, foreign security or immovable property situated outside India provided it was acquired when such a person was resident outside India or inherited from a person who was resident outside India. Further, capital account transactions are generally prohibited unless specifically permitted. Therefore, any subsequent transactions upon becoming a resident pertaining to a foreign asset may be subject to the approval of the Reserve Bank of India and repatriation requirements. Often pre-immigration planning involves the establishment of structures which mitigate the application of Indian income tax and exchange control regulations. For example, the assets of the individual may be held by a foreign company or trust which should avoid adverse Indian tax implications and also avoid Indian repatriation requirements. If India has a double taxation avoidance agreement with the other jurisdiction it may be relevant to determine the extent of treaty benefits (such as the tie breaker rule) that may be applicable in case the individual is taxable in both jurisdictions during his transition.
12. What are the main rules of succession, and what are the scope and effect of any rules of forced heirship?
In India rules of succession depend on the religion of the deceased. Forced heirship rules are also religion specific.
Hindus, Buddhists, Jains and Sikhs enjoy testamentary freedom to bequeath their whole estate or part thereof except coparcenary property, which is ancestral property and any other property voluntarily contributed to the joint family pool. Muslims however do not enjoy testamentary freedoms as they are not permitted to bequeath more than one third of their estate (after payment of funeral expenses, debts, etc.) without the consent of specified heirs. Further, they are subject to forced heirship rules where specified heirs of a Muslim are entitled to fixed shares. Goa (a state of India) follows community property rules where the testator is free to bequeath only half of his estate. Certain heirs of the deceased are 'forced heirs' who cannot be deprived of the shares of the estate of the deceased unless they are expressly disinherited by law. In the case of inter-religious marriages, the succession of the property of such persons is governed by the Indian Succession Act, 1925.
Intestate succession is as per a specific hierarchy provided under the various statutory provisions applicable based on the religion of the deceased such as the Hindu Succession Act, 1956 (for Hindus, Buddhists, Jains and Sikhs), the Indian Succession Act, 1925 (for Christians and Parsis), and Special Marriage Act, 1954 (for inter-religion marriages and succession of such persons).
13. Is there a special regime for matrimonial property or the property of a civil partnership, and how does that regime affect succession?
Goa is the only state in India that recognises the concept of matrimonial property i.e. property held as community property. The ownership and possession of the property acquired during marriage belongs to both spouses. However, property held by them prior to marriage may be declared to be their separate property through a deed/document which is executed under a seal. Upon the death of a spouse, the surviving spouse is entitled to half the share of the community property. The other half may be succeeded by the heirs of the deceased spouse or bequeathed (detailed in Question 12 above).
14. What factors cause the succession law of the jurisdiction to apply on the death of an individual?
The general principle is that succession to immovable property of an individual is governed by lex situs (the law of the place in which such immovable property is situated) and succession to movable property is governed by the law of the place in which the individual is domiciled. This principle is affirmed by the Supreme Court2 which has observed that every issue relating to immovable property is to be dealt only by the courts in whose jurisdiction the property is situated in thereby ruling out the application of the doctrine of renvoi (i.e. where a court adopts foreign law when faced with a situation of conflict of law).
Further, it is relevant to highlight that in case of marriages between a Hindu and a non-Hindu or marriages solemnized outside India, the succession of ancestral property in the case of Hindus is impacted. In such a case, the marriage may be solemnized under the Special Marriage Act, 1954 ("SMA") or the Foreign Marriage Act, 1969 ("FMA"), and the Hindu (being a member of a Hindu undivided family "HUF") shall be deemed to be severed from the HUF. Children born to such a couple would not be considered a coparcener and will not be entitled to any share in the ancestral property. The succession would be governed by the rules of testamentary and intestate succession contained in the Indian Succession Act, 1925.
15. How does the jurisdiction deal with conflict between its succession laws and those of another jurisdiction with which the deceased was connected or in which the deceased owned property?
Please see our response to Question 14 above.
16. In what circumstances should an individual make a Will, what are the consequences of dying without having made a Will, and what are the formal requirements for making a Will?
It is advisable for an individual with immovable property situated in India, or to whom Indian succession law applies, to make a will to ensure that his estate passes in accordance with his wishes. If an individual's only connection with India is that is that he owns real property in India, then the succession to that real property (whether intestate or testamentary succession) is in accordance with the Indian succession which depend on his religion (see Question 12 above).
The formal requirements for making a will include: (i) the testator should be an adult and of sound mind; (ii) the will should not be made by fraud, coercion or undue influence; and (iii) the will should be signed by the testator with at least two attesting witnesses. It is not mandatory to register or stamp a will. Certain religions have other specific rules. For example, if the testator being a Christian or Parsi designates a beneficiary as a witness, the bequest is invalid to the extent of such beneficiary. Muslims are allowed to make oral wills are per their personal laws.
17. How is the estate of a deceased individual administered and who is responsible for collecting in assets, paying debts, and distributing to beneficiaries?
The administration of a deceased individual's estate is governed by the Indian Succession Act, 1925. In case the deceased individual appoints an executor in his will, the executor will be responsible for collecting the assets, paying debts and distributing the assets to the beneficiaries. In the event no executor is appointed, or the executor is incapable or refuses to act, a court grants letters of administration to the universal/residual legatee. In the event the individual dies intestate, the heirs of the deceased may apply for letters of administration or a succession certificate before the court of the relevant jurisdiction in which the assets are situated.
18. Do the laws of your jurisdiction allow individuals to create trusts, private foundations, family companies, family partnerships or similar structures to hold, administer and regulate succession to private family wealth and, if so, which structures are most commonly or advantageously used?
Although foundations are not recognised in India, Indian law permits individuals to create trusts, partnerships and companies. A private trust is the most commonly used structure.
Families often set up a private discretionary and irrevocable trust for succession and estate planning. A settlement of a private family trust for the benefit of certain specified relatives of the settlor is eligible for tax exemptions under the ITA. It offers a long term solution by allowing the ability to ring fence the assets of the trust against any future creditor claim or imposition of future inheritance tax. The trust documentation enables flexibility in determining distribution milestones, dispute resolution procedures, and plan for future contingencies (for example, incapacitation of a spouse, special needs of a minor, etc.). However, setting up a private trust would involve stamp duty and registration costs which differ from state to state. Additionally, in cases where the trust involves non-residents, exchange regulations may restrict the operation of the trust.
19. How is any such structure constituted, what are the main rules that govern it, is there any requirement for registration with or disclosure to any authority or regulator, and what information about the structure is available to the public?
A private trust is constituted under the Indian Trusts Act, 1882 ("Trusts Act"). The general rule under Indian trust law is that a person can play any two of the three roles involved in a trust i.e. the roles of settlor, trustee or beneficiary. The trust is primarily governed by the terms of the trust deed and Trusts Act. In addition to the Trusts Act applicable real estate, tax, and securities law and exchange control regulations govern the settlement and operations of a trust.
A trust deed pertaining to a trust that is to hold immovable property is required to be adequately stamped and registered. The contents of the trust deed are generally confidential and need not be disclosed to any authority barring certain instances. For example, if the trust is proposed to hold listed Indian securities, in certain instances, the trust deed may be required to be disclosed to the securities regulator as per the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. Further, other forms of statutory disclosures may be required which would however not be publically available. In case the trust holds significant beneficial interest/ownership in a company as per the Companies Act, 2013 read with the Companies (Significant Beneficial Owners) Rules, 2018, it may be required to make disclosures with respect to such beneficial ownership/interest, voting rights, dividends receivable, extent of control and influence over the company, etc. Additionally, for tax purposes, the ITA also requires disclosures on seeking tax exemption (in the case of public charitable trusts) and filing tax returns. These disclosures are however not available to public.
20. How are such structures and their settlors, founders, trustees, directors and beneficiaries treated for tax purposes?
The income of trusts may be taxed in the hands of the trustees or beneficiaries depending on the kind of trust. Trustees are considered the representative assessees of a trust. In the case of a specific trust where the identity and share of the beneficiaries are known, tax is levied on the trustees or beneficiaries based on the individual slab rates of the beneficiaries. In the case of a discretionary trust or business trust, the trust is taxable at the maximum marginal rate. If the trust is a revocable trust, the settlor is taxable on the income of the trust. Further, a trust involves a single layer of tax and therefore, there should be no tax consequences on distributions to beneficiaries.
21. Are foreign trusts, private foundations etc recognised?
Yes, foreign trusts are recognised in India. Private foundations on the other hand are not recognised in India. A private foundation may be classified as a corporation (having a separate legal personality) or a trust depending on its structure. If it is classified as a trust and has trustees or beneficiaries in India, the income of the foundation may be subject to tax in India.
22. How are such foreign structures and their settlors, founders, trustees, directors and beneficiaries treated for tax purposes?
A foreign trust may be taxable in India if its income is sourced in India or if its beneficiaries are resident beneficiaries. An examination of the nature of the trust, control and management exercised by a resident trustee, applicable treaty provisions, etc. will be required to determine the applicability of Indian tax law. Such a trust may be taxed in India as detailed in Question 20 above.
23. To what extent can trusts, private foundations etc be used to shelter assets from the creditors of a settlor or beneficiary of the structure?
Trusts generally provide the ability to ring fence the assets from future creditors of a settlor or beneficiaries. The shares of a beneficiary are protected until the trust property is distributed. However, in certain circumstances under the Trusts Act, Insolvency and Bankruptcy Code, 2016 ("IBC"), and ITA, the trust may not offer complete protection in this regard. The Trusts Act provides that a trust created for an unlawful purpose is void. A trust created for the purposes of defrauding creditors would amount to an unlawful purpose. Further, the IBC imposes a two year look back period from the date of insolvency in case of transfers that are for inadequate consideration.3 Therefore, assets which are settled into the trust would not be completely ring fenced for the first two years from the date of settlement. Further, a settlement or gift by a settlor effected during the pendency of any proceeding under the ITA against him is void against any claim in respect of the tax or other sum payable.
24. What provision can be made to hold and manage assets for minor children and grandchildren?
In India, a private trust constituted under the Trusts Act provides the ability to hold and manage assets for minor children / grandchildren, future children or other vulnerable dependants. The trust deed may provide for periodic distributions or specific distributions for the purposes of medical treatment, maintenance, education, etc. in a manner that gives comfort to the settlor. The trust deed may also prohibit distributions until the minor reaches the age of majority. Apart from a separate structure, Indian legislation also recognises the ability to appoint guardians for minors and their properties. The guardian may be a natural guardian, a testamentary guardian, a guardian appointed under the Hindu Minority and Guardianship Act, 1956 (applicable to Hindus, Buddhists, Jains and Sikhs) or Guardianship and Wards Act, 1890.
25. Are individuals advised to create documents or take other steps in view of their possible mental incapacity and, if so, what are the main features of the advisable arrangements?
Documents such as living wills or lasting powers of attorney are currently not recognised or enforceable in India. Therefore, individuals are advised to explore other options. Private trusts remain one of the more elegant solutions for a future contingency involving incapacity. Such a trust arrangement would typically involve (i) permitting the individual to automatically become a beneficiary to the trust upon becoming; and (ii) providing specific income or capital distributions for the purposes of financing medical treatments, etc.
'Advance directives' are recognised under the Mental Health Act, 2017 which permit a 'nominated representative' to make medical healthcare or treatment decisions for a person who is mentally incapacitated. The Supreme Court of India4 also recognised advance directives with respect to decision relating to withholding or withdrawal of medical treatment subject to certain conditionalities. However, such advance directives do not currently cover decisions in relation to the financial assets of a person who is mentally incapacitated. In the absence of advance planning, the Rights of Persons with Disabilities Act, 2016 recognises a 'limited legal guardian' to take decisions on behalf of (or in consultation with) a person with disability (whether physical or mental disability) who is unable to make legally binding decisions. Such a guardian is to be appointed by a district court or a designated authority. This guardianship is limited to a specific period, decision or situation. However, court processes in India are long and tedious and it is strongly recommended to explore alternatives such as a trust structure, joint ownership of property, etc. if possible.
26. What forms of charitable trust, charitable company, or philanthropic foundation are commonly established by individuals, and how is this done?
There are three types of entities that are commonly used for charitable purposes i.e. a public trust, a charitable company or a society. Establishing a society is not often preferred by individuals as it requires a minimum of seven persons to associate for charitable purposes. Private individual philanthropists prefer establishing a public trust or a company registered under section 8 of the Companies Act, 2013.
The procedure to set up a public trust depends on the state in which the trust is to be set up. For example, if a public charitable trust is in the state of Maharashtra or Rajasthan, then it is to be registered by the charity commissioner and regulated under the respective state acts. Charity commissioners are provided with wide powers of oversight and control with respect to the operation and management of the public trust. Various states do not have any legislation governing public trusts and the trust would merely have to be set up through a trust deed registered under the Registration Act, 1908.
With respect to a charitable company, an application for registration under section 8 of the Companies Act, 2013 is to be made before the registrar of companies. A registration is granted provided the company is for specific objects (such as promotion of art, education, social welfare, religion, charity, etc.), the profits are to be applied for promoting such objects and payment of dividends are prohibited. The company is also highly regulated and is subject to various compliances.
27. What important legislative changes do you anticipate so far as they affect your advice to private clients?
The re-introduction of the estate duty law has been anticipated for the past few years. However, it is unclear on when it may be introduced. This uncertainty has not restrained families from planning for the potential introduction of estate duty. Further, other amendments which have been recently talked about include the direct tax code which could significantly amend the extant Indian tax regime and the private client planning landscape. We have also seen developments in relation to personal laws over the last few years. For example, although same sex marriages are not recognised in India, the Supreme Court of India ruled that Section 377 of the Indian Penal Code, 1860 which criminalised sexual activities "against the order of nature", was not applicable to consensual sexual activities between homosexual adults. Further, Indian courts have also begun to recognise 'live in relationships' and there is a presumption of legitimacy in favour of children born out of such relationships. A heavy burden lies on the person who wishes to disprove the relationship as the law favours legitimacy.
1 Please note these rates may be reduced in the event such payments are subject to treaty benefits.
2 Viswanathan (R) v. Rukn-Ul-Mulk Syed Abdul Wajid, AIR 1963 SC 1.
3 Section 165, IBC. Please note Part III of the IBC pertaining to individuals who file for bankruptcy has not yet been notified.
4 Common Cause (A Regd. Society) v. Union of India (UOI) and Ors. AIR 2018 SC 1665.
Published In:The Legal 500
Date: January 14, 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.