Spoke to a reputed Indian tax advisor yesterday. I will not name him but you can PM me. Regarding India tax treatment of foreign tax sheltered accounts, he said that as per Sec 89a you can file form 10EE and defer the tax on any accruals within the pot.
He said the intention of Section 89a is : India tax position on these vehicles will be the same as the treatment in those specific countries. This covers US, UK, Canada. Therefore in his opinion, there will be no tax upon accrual in 401k, Rollover IRA AND Roth IRA once you file form 10EE. I asked about UK ISA and UK pension and he said it should be the same since UK is also a country mentioned in Section 89a. I reminded him that there is no tax upon withdrawal from Roth IRA in US and ISA in UK because it is after-tax contribution and again he said India will most likely respect that.
But full clarity on Section 89a is still not available and it is still somewhat of a work in progress in terms of tax professionals fully understanding it. I have asked him to clarify with others who he thinks may be a true expert in this.
As per number of days I will still be RNOR this year even if I stay practically the whole year in India - because of last 4 years, last 7 years stay - so, knowing tax treatment of US/UK tax sheltered vehicles is not urgent for me. I have time to cross-check this with another expert. But the ones I spoke to are well known on reddit and they have various blogs and flow charts on ROR, NR, RNOR etc
Regarding unrealized gains accrued during India ROR stay and then taking a tax holiday abroad to crystallize the gains : again as the Indian law currently stands, you are evaluated as ROR, RNOR etc on yearly basis, so the approach of taking a tax holiday should technically work. He said that apparently you can say you have gone abroad for "seeking employment". But if the profits are large, he cannot rule out that it will not be challenged. So my fears of "bluejeansman vs Indian Revenue Service" may occur after all. I asked him if staying abroad longer might work then - more than 1 year - and he said possibly.
Regarding Accumulation units, ie funds that do not distribute dividends and roll it up into fund price, i.e NAV (Net Asset Vaue) of the fund, he confirmed that India does not tax such notional dividends. But this is a moot point for tax sheltered vehicles if their tax-sheltered nature is respected.
But now it may make sense to hold Accumulation units in Taxable accounts as well if India doesnt tax them, but quite painful if I return back to UK. Two examples are worth considering here :
Example 1: Lets say I am sitting on a large profit on Accumulation unit fund in UK taxable. if I sold them in UK I can take credit for dividends paid since I get a year-end tax certificate from my UK broker. If I sell them after going to India, will India give credit for the tax I aleady paid every year in UK on notional dividend ? He said yes but he also said you cannot go back too many years. So the solution here could be to exploit 30 day wash rule to sell and buy back before leaving for India. I have another thread on this. (apologies for the clutter).
Example 2 : I hold Accumulation units, lets say purchase price is $100. I sell at $200 in India (for rebalancing purpose). Now out of this let us say $40 is dividends and $60 is capital gains. India does not tax dividends but does tax capital gain at say 20%. So I pay tax of $20 in India. Then I return back to UK before the 3-year or 5-year curfew period. Now UK HMRC will demand their cut on the $100 gain. In UK I would pay dividend tax of say $10 on $40 dividends. On Capital gains of $60, let us say UK'a capital gains tax comes to 20% of $60 = 12 minus tax paid in India (hopefully get credit for that) so I pay nothing. But then I get taxed on "dividend part" of $40 twice.
Easy to just hold distributing funds in Taxable and just pay the tax.
Just wanted to update. Usually I am a consumer here, thought let me give something back.
He said the intention of Section 89a is : India tax position on these vehicles will be the same as the treatment in those specific countries. This covers US, UK, Canada. Therefore in his opinion, there will be no tax upon accrual in 401k, Rollover IRA AND Roth IRA once you file form 10EE. I asked about UK ISA and UK pension and he said it should be the same since UK is also a country mentioned in Section 89a. I reminded him that there is no tax upon withdrawal from Roth IRA in US and ISA in UK because it is after-tax contribution and again he said India will most likely respect that.
But full clarity on Section 89a is still not available and it is still somewhat of a work in progress in terms of tax professionals fully understanding it. I have asked him to clarify with others who he thinks may be a true expert in this.
As per number of days I will still be RNOR this year even if I stay practically the whole year in India - because of last 4 years, last 7 years stay - so, knowing tax treatment of US/UK tax sheltered vehicles is not urgent for me. I have time to cross-check this with another expert. But the ones I spoke to are well known on reddit and they have various blogs and flow charts on ROR, NR, RNOR etc
Regarding unrealized gains accrued during India ROR stay and then taking a tax holiday abroad to crystallize the gains : again as the Indian law currently stands, you are evaluated as ROR, RNOR etc on yearly basis, so the approach of taking a tax holiday should technically work. He said that apparently you can say you have gone abroad for "seeking employment". But if the profits are large, he cannot rule out that it will not be challenged. So my fears of "bluejeansman vs Indian Revenue Service" may occur after all. I asked him if staying abroad longer might work then - more than 1 year - and he said possibly.
Regarding Accumulation units, ie funds that do not distribute dividends and roll it up into fund price, i.e NAV (Net Asset Vaue) of the fund, he confirmed that India does not tax such notional dividends. But this is a moot point for tax sheltered vehicles if their tax-sheltered nature is respected.
But now it may make sense to hold Accumulation units in Taxable accounts as well if India doesnt tax them, but quite painful if I return back to UK. Two examples are worth considering here :
Example 1: Lets say I am sitting on a large profit on Accumulation unit fund in UK taxable. if I sold them in UK I can take credit for dividends paid since I get a year-end tax certificate from my UK broker. If I sell them after going to India, will India give credit for the tax I aleady paid every year in UK on notional dividend ? He said yes but he also said you cannot go back too many years. So the solution here could be to exploit 30 day wash rule to sell and buy back before leaving for India. I have another thread on this. (apologies for the clutter).
Example 2 : I hold Accumulation units, lets say purchase price is $100. I sell at $200 in India (for rebalancing purpose). Now out of this let us say $40 is dividends and $60 is capital gains. India does not tax dividends but does tax capital gain at say 20%. So I pay tax of $20 in India. Then I return back to UK before the 3-year or 5-year curfew period. Now UK HMRC will demand their cut on the $100 gain. In UK I would pay dividend tax of say $10 on $40 dividends. On Capital gains of $60, let us say UK'a capital gains tax comes to 20% of $60 = 12 minus tax paid in India (hopefully get credit for that) so I pay nothing. But then I get taxed on "dividend part" of $40 twice.
Easy to just hold distributing funds in Taxable and just pay the tax.
Just wanted to update. Usually I am a consumer here, thought let me give something back.
Statistics: Posted by bluejeansman — Tue Jun 11, 2024 1:00 am — Replies 22 — Views 4887