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Retiring in India— A shattered dream due to changes in tax laws

RANVIR MOHINDRA

Many people of Indian origin have dreamed about spending more time in India after they retire. Under the changes taking place in the U.S. and Indian tax laws, this dream may result in much higher taxes (sometimes more than double).

To understand all the changes that have taken place recently, as well as the severe civil and criminal penalties for non compliance, we are providing a quick snapshot in this article. This is not to be taken as tax or legal advice, but intended to guide readers on the relevant issues.

1. Tax coordination between US and India

Both countries have agreed on reporting of tax information to each other. Points of interest include:

  • The United States requires each U.S. citizen or permanent resident to report worldwide income. This includes reporting of foreign financial assets in excess of $10,000.
  • The foreign financial assets have to be reported annually on a form known as FBAR.
  • The foreign income has to be reported in the normal income tax filings on the Form 1040.
  • Special attention has to be paid to completing form 8938.
  • The penalties for not reporting are from 5% to over 100% of your foreign assets and may include criminal penalties.
  • Sometimes, people think that the U.S. government cannot find out about your foreign assets. This has also changed. Banks and financial institutions in India are required to report your earnings to the IRS under the FATCA (foreign account tax compliance act).
  • Once this information is reported, you may receive a letter from the IRS. There are severe penalties for every day that you do not respond.

2. Residency and taxation in India

The Indian government will normally tax foreign citizens only on income in India. However, this changes when you become a resident in India. In such a case, you will be taxed on your worldwide income.

Most people think that if you stay in India for less than half the year (182 days) you are not a resident. This may not be true. India has multiple tests that determine residency. In many cases, you will be deemed to be an Indian resident if you stay for more than 360 days over a four-year period. As a consequence of becoming an Indian resident is that your total tax bill may more than double. This is in spite of the double-taxation treaty between the two countries.

Take the example of a senior couple with a gross income of $100,000 per year. After personal exemptions and deductions, their taxable income would be about $75,000, resulting in a Federal Income Tax between $10,000-11,000 per year.

If they are also deemed to be residents of India, their taxable income in India would be above $22,000 per year. Under this situation, the couple would pay $11,000 to the U.S. treasury and an additional $11,000 to the Indian treasury.

3. Selling property in India

If an NRI sells property in India, the withholding of taxes is much higher than what is required for Indian citizens. In most cases, the buyer has to withhold and deposit up to 30.6% of the sales price. For Indian citizens, this requirement is only 1%. You are told that you can get the refund from the Income tax department, but that is very cumbersome. There are proactive ways to avoid this situation from happening to you.

4. Taxation of ancestral inherited or gifted property in India

If you inherit a property in India, you are required to pay normal capital gains in taxes. These gains are calculated as the difference in sales price minus the indexed cost price of the property. However you could have a big windfall under the U.S. tax laws.

In the U.S., the profit for inherited or gifted property is calculated as the difference in sales price and the stepped up cost basis of the market value of the property on the date of inheritance (or gifting). This treatment could result in a windfall of many thousands of dollars and the refund comes from the U.S. treasury and/or is given as a lifetime foreign tax credit.

5. Investing in India

Interest rates are higher in India, but so is the rate of inflation. If you keep money in a NRE account in India, there are no taxes to be paid in India, but they must be paid in the U.S. The same thing is true for capital gains and dividends in India. No taxes are due in India, but they must be paid in the U.S. With the coordination of taxes between the two countries, there is no possibility of avoiding these taxes. Also, many institutions will not accept investments from U.S. citizens because of the cumbersome reporting requirements.

I hope this article provides a brief summary of the new rules on income and taxes that have emerged. We will be covering some of these issues in greater detail in future issues. If you need additional information, please feel free to contact us for a no-obligation, initial review of your individual situation.

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A resident of Texas for over 40 years, Ranvir Mohindra has been involved with many issues that are relevant to the South Asian community living in the United States. Whether you have money in India that you did not report or have inherited an ancestral property, there are new rules of compliance. Mr. Mohindra’s expertise is built on personal experiences and access to tax and legal professionals, both in Houston and in India, who can provide additional support to bring you in compliance and protect your assets. He can be reached at 713-805-0915 or nritax.wealth@gmail.com

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Pros And Cons Of Retiring In India

mts_nov162016

MTS Golden Group members in Pearland TX listen with interest to Ranvir “Biki” Mohindra’s (right) presentation on retiring in India.

Wed, Nov 16, 2016

PEARLAND – Many seniors have thought about spending their retirement years in India. How practical is it in view of the changing tax policies of both the United States and India?

 A presentation on this topic was made by Ranvir “Biki” Mohindra, founder and principal of NRI Tax & Wealth Advisors on Sunday, November 13 afternoon before the Meenakshi Temple Society’s Golden Group, an organization of seniors and soon-to-be seniors.

 About 20 members of the Golden Group attended the presentation.

 After an introduction by Convener Ramamurthy Ramsunder, Mohindra explained the advantages and disadvantages of retiring in India. Among the advantages Mohindra cited were possible low cost of living, availability of domestic servants and drivers, religion and spirituality and high rates of return on bank accounts.

 As Mohindra explained it, each of these advantages has a built-in disadvantage.

 “It takes me a week to recover from visiting a temple in India,” Mohindra explained.

 “I would rather go to a temple in the U.S., such as the Meenakshi temple here.”

 Specific disadvantages Mohindra mentioned were not being close to children and grandchildren, traffic and urban congestion, cleanliness and sanitation, potential currency devaluation and demonetization, bureaucratic red tape (PAN, ADHAR cards, filing taxes) and corruption in daily life.

 Mohindra explained a Catch 22 situation regarding PAN and ADHAR cards.

 “You have to have proof of residency such as a utility or bank account to obtain a PAN card, but in order to set up a utility connection or a bank account, you have to have a PAN card,” explained Mohindra.

 There’s corruption in daily life, Mohindra explained.

 “If a utility bill is due on the 20th, you invariably get it on the 25th or later,” he explained.

 “As a result, your payment is always delinquent. To fix the delinquency, you have to pay a small bribe to the clerk. With the Modi government’s war against corruption, the government servants are asking for double the amount, in case of getting caught.”

 The biggest hurdles to retiring in India are residency tests and taxation both in U.S. and India.

 “Because of its one-year and four-year tests, you are in danger of being categorized as a resident if you stay past 90 days in a year. As an Indian resident, you could liable for paying global income taxes to both U.S. and India. A senior couple with $100K income could end up paying $11,000 to the U.S. government and another $11,000 to the Indian government.”

 Mohindra did identify Auroville in Pondicherry as a desirable retirement community in India and explained a possible loophole in getting a sizeable tax credit from the U.S. government for selling ancestral property in India.

 Mr. Mohindra is currently writing a series of articles on NRI taxes and generating wealth in India in India Herald.

This article was originally printed in India Herald.

____________________

A resident of Texas for over 40 years, Ranvir Mohindra has been involved with many issues that are relevant to the South Asian community living in the United States. Whether you have money in India that you did not report or have inherited an ancestral property, there are new rules of compliance. Mr. Mohindra’s expertise is built on personal experiences and access to tax and legal professionals, both in Houston and in India, who can provide additional support to bring you in compliance and protect your assets. He can be reached at 713-805-0915 or nritax.wealth@gmail.com

Golden Group members in Pearland TX listen with interest to Ranvir “Biki” Mohindra’s (right) presentation on retiring in India.

Wed, Nov 16, 2016

PEARLAND – Many seniors have thought about spending their retirement years in India. How practical is it in view of the changing tax policies of both the United States and India?

 A presentation on this topic was made by Ranvir “Biki” Mohindra, founder and principal of NRI Tax & Wealth Advisors on Sunday, November 13 afternoon before the Meenakshi Temple Society’s Golden Group, an organization of seniors and soon-to-be seniors.

 About 20 members of the Golden Group attended the presentation.

 After an introduction by Convener Ramamurthy Ramsunder, Mohindra explained the advantages and disadvantages of retiring in India. Among the advantages Mohindra cited were possible low cost of living, availability of domestic servants and drivers, religion and spirituality and high rates of return on bank accounts.

 As Mohindra explained it, each of these advantages has a built-in disadvantage.

 “It takes me a week to recover from visiting a temple in India,” Mohindra explained.

 “I would rather go to a temple in the U.S., such as the Meenakshi temple here.”

 Specific disadvantages Mohindra mentioned were not being close to children and grandchildren, traffic and urban congestion, cleanliness and sanitation, potential currency devaluation and demonetization, bureaucratic red tape (PAN, ADHAR cards, filing taxes) and corruption in daily life.

 Mohindra explained a Catch 22 situation regarding PAN and ADHAR cards.

 “You have to have proof of residency such as a utility or bank account to obtain a PAN card, but in order to set up a utility connection or a bank account, you have to have a PAN card,” explained Mohindra.

 There’s corruption in daily life, Mohindra explained.

 “If a utility bill is due on the 20th, you invariably get it on the 25th or later,” he explained.

 “As a result, your payment is always delinquent. To fix the delinquency, you have to pay a small bribe to the clerk. With the Modi government’s war against corruption, the government servants are asking for double the amount, in case of getting caught.”

 The biggest hurdles to retiring in India are residency tests and taxation both in U.S. and India.

 “Because of its one-year and four-year tests, you are in danger of being categorized as a resident if you stay past 90 days in a year. As an Indian resident, you could liable for paying global income taxes to both U.S. and India. A senior couple with $100K income could end up paying $11,000 to the U.S. government and another $11,000 to the Indian government.”

 Mohindra did identify Auroville in Pondicherry as a desirable retirement community in India and explained a possible loophole in getting a sizeable tax credit from the U.S. government for selling ancestral property in India.

 Mr. Mohindra is currently writing a series of articles on NRI taxes and generating wealth in India in India Herald.

This article was originally printed in India Herald.

____________________

A resident of Texas for over 40 years, Ranvir Mohindra has been involved with many issues that are relevant to the South Asian community living in the United States. Whether you have money in India that you did not report or have inherited an ancestral property, there are new rules of compliance. Mr. Mohindra’s expertise is built on personal experiences and access to tax and legal professionals, both in Houston and in India, who can provide additional support to bring you in compliance and protect your assets. He can be reached at 713-805-0915 or nritax.wealth@gmail.com