I am a senior executive in a private limited company and considering a move to our US offices. The move is planned for January 2023 and the duration is uncertain, likely to last for several years. I have a questions:
1. Am I an Indian tax resident for FY 22-23 but non-resident from FY 23-24. I will be a tax resident in the US from 2023 as they have a January to December tax year.
If the stay in India during FY 22-23 is more than 182 days, then yes, you will be tax resident in India for FY 22-23. For FY 23-24, you will be a non-resident if the period of stay in India does not exceed 182 days.
2. For January to March 2023, will my US income be tax free in India or will I get credit for taxes paid in US due to tax treaties?
Since you will be tax resident in India for FY 22-23, the global income for the period April 01, 2022 to March 31, 2023 will be taxable in India. However, the credit of taxes paid in the United States of America will be available in India.
Please remember to submit Form 67 to claim Foreign Tax Credit in India, before filing your Income Tax Return.
3. In the US, from 2023, will I get a credit for any income tax paid in India?
By virtue of Article 25 of the tax treaty between India and the United States, the United States must allow any income tax paid to India as a credit to its resident.
4. The situation with regard to capital gains and EPF seems to be very complicated. I have substantial investments in stocks and mutual funds (mainly equity, some debt and some balanced, but all in growth schemes) and have EPF corpus.
From everything I have read, it appears that when I sell my shares or mutual funds, the capital gains are considered US source income under US tax laws and no credit is available for capital gains tax paid in India. Will not done. For equity investments, this would result in me paying 10% in India (on gains above the non-taxable limit) and 15% in the US, totaling 25% capital gains tax. The only exception is if I pay more than or equal to 10% of the total capital gains as tax, in which case the capital gains are treated as foreign source income in the US. However, due to the tax-free limit of 1 lakh and no tax on income up to 2.5 lakh, my effective tax rate in India would be less than 10% and I would have to pay double tax. For debt funds, the effective tax can be more than 10% and hence I will get exemption for taxes paid in India. Is this correct or am I missing the opportunity to take credit on all capital gains?
By virtue of Article 25 of the tax treaty between India and the United States, the United States must allow any income tax paid to India as a credit to its resident. Foreign tax credit in the US on capital gains is based on their domestic tax laws and you should consult a tax expert/professional in the US. Capital gains in India are taxed depending on the type of investment and the holding period of the asset.
In case of equity funds, where the holding period is less than 12 months, the tax rate is 15% + surcharge + cess. Where the holding period exceeds 12 months, the tax rate on any gain above is 10% + surcharge + cess 100,000. Please note that these tax rates are applicable even if the income is less than the maximum amount which is not chargeable to tax, ie, 250,000.
In case of debt funds, where the holding period is less than 36 months, income tax is calculated at the applicable slab rate. In other cases, the rate of tax is 20% + cess + surcharge (irrespective of slab rate).
5. This move requires me to resign from the Indian unit, after which I will be eligible to withdraw my entire EPF corpus. I plan to do so and will use it for the expenses of setting up in the US. This amount will be tax free in India, but will it be considered as income in the US and taxed there? Since my Indian employment will end in late December 2022 or January 2023, I will receive some amount in 2023 to bring it under US tax net in 2023.
For US tax liability, please consult a tax expert/professional in US to calculate applicable taxes after standard deductions. In India, withdrawal of EPS after five years of continuous service is free of taxes and no additional tax is payable in India.
Questions answered by Neeraj Agarwal, Partner, Nangia Andersen India
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