[Moving back to India from US - What US income is not taxed?]

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odyssey
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Joined: Thu Jun 20, 2019 7:19 pm

[Moving back to India from US - What US income is not taxed?]

Post by odyssey »

[Moved into a stand-alone thread from: Indian withdrawing from Roth IRA- tax --admin LadyGeek]

Folks: I lived in the US many years, and decided to relocate to India.

What US income is not taxed in India.

This is what I am certain:
1. Social Security No Taxes.
2. If you have a US Government Pension. No Taxes.
3. Bank interests taxable.
4. Rental Income taxable.

Does anyone know for certain the tax treatment for IRA's.? Something similar in India is a PPF (which is not taxed in India). In the same way IRA is not taxed in USA until withdrawls occur. Or in a Roth IRA no US taxes.

I am not sure about now, but there was a time in India where Long Term stock capital gains were not taxed nor were dividends.
codedude
Posts: 69
Joined: Thu Jan 26, 2017 9:15 pm

Re: [Moving back to India from US - What US income is not taxed?]

Post by codedude »

odyssey,

You are planning to relocate to India. Are you a US citizen or green card holder? If so, the answers below will be different.

Assuming you are not a US citizen or green card holder:

Let us say you leave the US on August 1, 2019.

Whether you owe US taxes or not for 2019, you need to “log out” from the US tax system. In early 2020, you need to file a dual status return with the IRS. Since you will be a non-resident, you will need to file a 1040NR for the period August 2, 2019 to December 31, 2019, there will be a 1040NR for this period, and a 1040 covering the rest of the year.

Once in India, you will be in an RNOR (Resident not ordinarily resident) tax status assuming you have lived outside India mostly. While you have this status, you will be generally taxed on income arising in India or if you work for a foreign employer while being in India. Any foreign assets don’t get taxed, though you may have to declare them in your Indian tax return.

When you are no longer an RNOR, you become an Indian resident for tax purposes (lookup how/when), your foreign assets will also be taxed. This includes Trad and Roth IRAs. They will be treated like a regular taxable account with capital gains and dividends taxes. Long term capital gains may not be taxed, but this only applies to stocks/funds listed on Indian stock exchanges, which will not be what you will have in your Roth IRAs and Trad IRAs. So they will be subject to tax.

To minimize capital gains, in the days before you become an Indian tax resident, you can sell and buy back the same funds in your tax advantages accounts - IRAs, 401ks, HSAs so that the tax basis gets reset and you don’t owe Indian capital gains any more than you have to.

If you are a US citizen or green card holder, the logging out part is different.

I am not a tax pro or anything, just a regular dude, so please check this with a tax pro before you act.
Topic Author
odyssey
Posts: 9
Joined: Thu Jun 20, 2019 7:19 pm

Re: [Moving back to India from US - What US income is not taxed?]

Post by odyssey »

Codedude. Thank you for your detailed answer.

I am a US Citizen. I concur with the various items you mentioned as taxable in India. However Pensions and including Public pensions in USA are not taxed in INdia as per the Double taxation treaty.

The only item not clear is the Taxation of IRA's and Roth IRA's in India. So the PPF is not taxable in India nor in the US.

IRA's and Roth IRA's are treated as pensions and even the US Income tax department can only touch these funds under extreme cases. Also if a person in the US owes money to creditors. These funds are not touchable since they are pensions.

So I am confused as to; even if the IRS (USA) treats IRA's as Sacred; under what clause can the Indian Tax department DIP into these funds
codedude
Posts: 69
Joined: Thu Jan 26, 2017 9:15 pm

Re: [Moving back to India from US - What US income is not taxed?]

Post by codedude »

odyssey,

If one tries to say that IRAs are pensions, I don’t think that is valid. If you look at the DTAA ( double taxation avoidance agreement) between India and USA, pensions are defined as regular payments for services performed, which IRAs are not.

You can look at item 8 of an advance ruling about IRA taxation by the Indian government (You can try to find original sources) - https://indiankanoon.org/doc/1997637/ ).

Even with this , you are on the hook only for the dividends if you don’t generate capital gains. This could be 2-5% of the balance becoming taxable.

Thanks.
sharukh
Posts: 297
Joined: Mon Jun 20, 2016 10:19 am

Re: [Moving back to India from US - What US income is not taxed?]

Post by sharukh »

May be rollover ira into 401k?
SlowMovingInvestor
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Re: [Moving back to India from US - What US income is not taxed?]

Post by SlowMovingInvestor »

odyssey wrote: Sat Jun 22, 2019 9:25 pm IRA's and Roth IRA's are treated as pensions and even the US Income tax department can only touch these funds under extreme cases. Also if a person in the US owes money to creditors. These funds are not touchable since they are pensions.
I don't believe all IRAs are protected from creditors. And I don't see how IRAs are pensions at all. They are retirement accounts. They are not guaranteed by the PGBC.
odyssey wrote: Sat Jun 22, 2019 9:25 pm So I am confused as to; even if the IRS (USA) treats IRA's as Sacred; under what clause can the Indian Tax department DIP into these funds
Foreign governments are under no obligation to treat US tax laws or US retirement accounts as 'sacred' unless special provisions are made under taxation treaties. And vice versa, of course.

Besides, there are plenty of other types of tax advantaged accounts in the US -- 403 accounts, 401k and others, HSA, 529 etc. Should foreign governments treat them all as sacred ? And with Roth IRAs and HSAs in particular, there is really no double taxation, since they aren't taxed at all.
Topic Author
odyssey
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Re: [Moving back to India from US - What US income is not taxed?]

Post by odyssey »

Folks when you say IRA dividends are taxed.

Is it if you withdraw the dividend? In other words if there are dividend stocks in the portfolio, whose dividend you do not take out but stays within the IRA. Then is that also a taxable event?
SlowMovingInvestor
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Joined: Sun Sep 11, 2016 11:27 am

Re: [Moving back to India from US - What US income is not taxed?]

Post by SlowMovingInvestor »

The way to think about it is that a foreign government (barring special treaty provisions) will treat an IRA account exactly the same as it treats a regular US based brokerage/MF account.

Whatever taxes would be due under foreign tax law on a regular US brokerage account will be due on an IRA account because the foreign government doesn't see them as anything special.

So I presume a dividend would be taxable. But taking something out of an IRA would not be a taxable event because it's just like transferring from one brokerage account to another to a foreign government.
Topic Author
odyssey
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Joined: Thu Jun 20, 2019 7:19 pm

Re: [Moving back to India from US - What US income is not taxed?]

Post by odyssey »

So slowmoving investor... If I transfer from IRA to Roth IRA. Would that be a Taxable event in India. Because in USA it is a taxable event.
SlowMovingInvestor
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Re: [Moving back to India from US - What US income is not taxed?]

Post by SlowMovingInvestor »

odyssey wrote: Mon Jun 24, 2019 4:17 pm So slowmoving investor... If I transfer from IRA to Roth IRA. Would that be a Taxable event in India. Because in USA it is a taxable event.
I don't know anything about Indian tax laws, but I would think it would be like transferring from one brokerage account to another. So it should not be a taxable event in India.

Again, the way to look at it is to forget that an account is called an IRA or a Roth IRA in the US. Think of them as just normal brokerage accounts. That is how they would be taxed by a foreign government unless there are specific treaty provisions otherwise.

On the other side, an Indian retirement account would likely be taxable under US law, since the US taxes your worldwide income even if you are resident in India.
Topic Author
odyssey
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Joined: Thu Jun 20, 2019 7:19 pm

Re: [Moving back to India from US - What US income is not taxed?]

Post by odyssey »

codedude wrote: Sun Jun 23, 2019 4:45 pm odyssey,

If one tries to say that IRAs are pensions, I don’t think that is valid. If you look at the DTAA ( double taxation avoidance agreement) between India and USA, pensions are defined as regular payments for services performed, which IRAs are not.

You can look at item 8 of an advance ruling about IRA taxation by the Indian government (You can try to find original sources) - https://indiankanoon.org/doc/1997637/ ).

Even with this , you are on the hook only for the dividends if you don’t generate capital gains. This could be 2-5% of the balance becoming taxable.

Thanks.
Hi--I read the link you posted. OK. I can see that interest will be taxed in INdia. But it does not mention dividends. From what I know about dividends in INdia. From this fiscal year for the first time up to 10 Lakhs will be tax exempt. (In previous years ALL dividends were exempt).

Am I correct in assuming that from this Fiscal year 18-19. 10 Lakhs of dividend is exempt. And in all previous years dividends are not taxed. That is why this 1996 document only refers to interest.
Topic Author
odyssey
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Joined: Thu Jun 20, 2019 7:19 pm

Re: [Moving back to India from US - What US income is not taxed?]

Post by odyssey »

In other words there has been no Double Taxation in India with dividends. They are taxed at the Corporate Level ONLY. Unlike in USA where they are taxed at Corporate and Personal level.

Only from this Fiscal year 2018-2019 will India begin charging taxes on dividends at personal level. But dividends above 10 Lakhs only.
codedude
Posts: 69
Joined: Thu Jan 26, 2017 9:15 pm

Re: [Moving back to India from US - What US income is not taxed?]

Post by codedude »

odyssey,

What you are saying about dividend exemption from tax is right but only if they are generated from Indian stocks. I don’t know if “Indian stock” means securities listed on Indian stock exchanges or even an ADR listed on a US exchange like Infosys would count. The foreign stock dividends will be taxed at the marginal rate.

Here are some things one could do:
- Be in the RNOR (not ordinarily resident) status for as long as possible by spending some time outside India periodically.
- If you pay these taxes, check if you will get a foreign tax credit or deduction on your US tax return.
Topic Author
odyssey
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Joined: Thu Jun 20, 2019 7:19 pm

Re: [Moving back to India from US - What US income is not taxed?]

Post by odyssey »

codedude wrote: Mon Jun 24, 2019 9:17 pm odyssey,

What you are saying about dividend exemption from tax is right but only if they are generated from Indian stocks. I don’t know if “Indian stock” means securities listed on Indian stock exchanges or even an ADR listed on a US exchange like Infosys would count. The foreign stock dividends will be taxed at the marginal rate.

Here are some things one could do:
- Be in the RNOR (not ordinarily resident) status for as long as possible by spending some time outside India periodically.
- If you pay these taxes, check if you will get a foreign tax credit or deduction on your US tax return.
Looks as if one has to rethink the prospect of moving back to India. Because as one grows older it may be difficult to travel to maintain NRI status.

So the question remaining is the difference between Roth IRA and IRA for Indian Taxes. The 1996 link does not address that because I think Roth was probably non-existent in 1996.

So the big question is the treatment of Roth IRA vs IRA for Indian Taxes.
Topic Author
odyssey
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Joined: Thu Jun 20, 2019 7:19 pm

Re: [Moving back to India from US - What US income is not taxed?]

Post by odyssey »

Thinking further:

It appears that as a PIO one should not accept a transfer/posting to India for 3 years either. Because under the RNOR rules one can only SAFELY be NRI for about 2 years.

3 year India posting is fantastic for career etc. But as PIO the tax uncertainty is probably not worth it.
Topic Author
odyssey
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Re: RNOR and ROR status

Post by odyssey »

Folks I am trying to look into the Indian Tax Laws to determine the OFFICIAL way that days in India are counted. Some say count both arrival day and departure day

Left India April 12th 2018.
Came Back April 25th 2018
Left India June 5th 2018
Came back July 8th 2018
Left India November 13th 2018.
Stayed overseas for the rest of the financial year.

If I do not use Arrival and Departure dates I have 177 days.
If I use either arrival or departure, I have 180 days
If I use Both arrival and departure I have 183 days

Am I NRI for Indian FY 2018-2019.
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