India Tax on residents on US 401K / IRA / Roth IRA UK Pensions / ISA ?

For investors outside the US. Personal investments, personal finance, investing news and theory.
Sister forums: Canada, Spain (en español)
---------------
Post Reply
Topic Author
bluejeansman
Posts: 293
Joined: Sun Oct 19, 2008 6:50 pm

India Tax on residents on US 401K / IRA / Roth IRA UK Pensions / ISA ?

Post by bluejeansman »

How does India tax ROR (resident and ordinarily resident) individuals on US 401K/IRA, US Roth IRA, UK Pension, UK ISA ?

Is it true that once upon a time these were taxed upon accruals and not on withdrawal? If I recall, the advice used to be to sell and buy back the assets within the tax sheltered account during the RNOR (resident but not ordinarily resident) period, to "reset" the cost basis.

But as per section 89a, it looks like India will only tax these upon withdrawal which makes Roth IRA and UK ISA a really bad idea. If this is true, then only 401K/IRA looks like a good idea. I am not sure the 25% tax free lumpsum in UK pensions will be honored by India.

Please clarify. Thanks a ton !
sharukh
Posts: 649
Joined: Mon Jun 20, 2016 10:19 am

Re: India Tax on residents on US 401K / IRA / Roth IRA UK Pensions / ISA ?

Post by sharukh »

You can withdraw your Roth contributions tax free. Also roll overs of Roth too I guess.

Just withdraw Roth contributions rollover money before India taxes kick in
Topic Author
bluejeansman
Posts: 293
Joined: Sun Oct 19, 2008 6:50 pm

Re: India Tax on residents on US 401K / IRA / Roth IRA UK Pensions / ISA ?

Post by bluejeansman »

Thanks Sharukh.
Just withdraw Roth contributions rollover money before India taxes kick in
Regarding Roth IRA : Above may be too late for me. I will most likely be ROR this year.

I was RNOR last year. At that time, I sold the assets within the Roth IRA and bought them back, all within the Roth IRA but did not take it out. I did the same for my UK Pension and my UK ISA (which is similar to US Roth IRA) - I did this to "reset the cost basis" under the possibly erroneous assumption that India taxes these buckets as if they are normal taxable accounts.

Even today an accountant told me that India taxes Roth IRA just like a "normal taxable account". So lets say I invested $10 post tax dollars a zillion years ago in the Roth, and it grew to $100 during my RNOR. By selling and buying back I have set the cost basis to $100. If, as ROR, it now grows to $110 and I sell within the Roth IRA itself without withdrawing, my accountant tells me today that I, as ROR, would have to pay tax on the $10. But then what about withdrawals ? As ROR will I be asked to pay income tax rates on that ? He said he will find out.

Hard to find accountants who really know the nuances here.

So I need to know the tax treatment in India for each of the following events as they arise in each of the buckets for someone who is an ROR : By bucket, I refer to any of these : IRA, Roth, UK ISA, UK Pension
- dividend paid out within the bucket but money not taken out
- notional dividend paid out within the bucket (such as UK fund accumulation units).
- capital gains realized within the bucket by selling an asset but money not taken out
- Taking withdrawals from the bucket.
sharukh
Posts: 649
Joined: Mon Jun 20, 2016 10:19 am

Re: India Tax on residents on US 401K / IRA / Roth IRA UK Pensions / ISA ?

Post by sharukh »

bluejeansman wrote: Wed May 15, 2024 4:14 am
Even today an accountant told me that India taxes Roth IRA just like a "normal taxable account". So lets say I invested $10 post tax dollars a zillion years ago in the Roth, and it grew to $100 during my RNOR. By selling and buying back I have set the cost basis to $100. If, as ROR, it now grows to $110 and I sell within the Roth IRA itself without withdrawing, my accountant tells me today that I, as ROR, would have to pay tax on the $10. But then what about withdrawals ? As ROR will I be asked to pay income tax rates on that ? He said he will find out.
That seems right. for the last $10. As a boglehead who does buy and hold, it wont be a problem. time both the sale and withdrawal at the same time.
You still have to pay yearly taxes on dividends for India, if you hold the documents correctly for long and keep track of the basis, then you may avoid double taxation when you withdraw.
One way to avoid double taxation, is to just withdraw the dividends every year, pay tax every year, and dont let it sit in Roth.

bluejeansman wrote: Wed May 15, 2024 4:14 am So I need to know the tax treatment in India for each of the following events as they arise in each of the buckets for someone who is an ROR : By bucket, I refer to any of these : IRA, Roth, UK ISA, UK Pension
- dividend paid out within the bucket but money not taken out
- notional dividend paid out within the bucket (such as UK fund accumulation units).
- capital gains realized within the bucket by selling an asset but money not taken out
- Taking withdrawals from the bucket.
what are you doing for the taxable accounts ?
Are you a Indian Citizen or US citizen ?
Topic Author
bluejeansman
Posts: 293
Joined: Sun Oct 19, 2008 6:50 pm

Re: India Tax on residents on US 401K / IRA / Roth IRA UK Pensions / ISA ?

Post by bluejeansman »

Thanks for the detailed reply but I kind of lost you on on the first paragraph.

I dont have a US green card or citizenship. I am a non resident alien from US standpoint. I am a British naturalized citizen. Born in India. UK fully recognizes tax sheltered aspect of US Roth IRA, exactly like USA : dividends, capital gains, withdrawals are not taxed. UK also does not tax Roth conversion. So it made sense to do a $30,000 Roth conversions per year over few years. I started Roth Conversion in Tax year 2013 and finished them all in tax year 2019.

I started Roth contribution around 1999 - 2004 etc. I bought the old "Foolish Four" stocks and they didnt do well. As late as 2011, I had only $11,000 in the account. Right now the value is $300,000 after Roth Conversions.

Lets take an example : And Assume I am 60 years of age. As of 2 months ago, let us say my Roth had a value of 9000 units of a $10 stock each totalling $90,000. This was during RNOR. I sold it all and and bought them back in RNOR. So my cost basis is $10. Now, as ROR, let us say the stock price stays the same but I get a dividend of $200. The dividends are auto invested. So, are you saying I should sell $200 worth of shares (20 shares) and withdraw it immediately ? So I would just pay dividend tax on the the $200 and No special withdrawal tax ?

Instead Suppose the stock had also doubled the day after dividend generated so its now a $20 stock when I sell. So I should then sell only 10 shares to generate $200 and then pay dividend tax and this time I should also pay also capital gains tax ?

If I leave it as it is and never withdraw and just decide to pay tax from other funds then consider the following scenarios :
1) dividend paid out within the bucket but money not taken out : Only dividend tax to pay (from other funds) ?
2) capital gains realized within the bucket by selling an asset -for relabancing purpose - but money not taken out ? Only Capital gains tax to pay (from other funds) ?
3) Now consider taking withdrawals from the bucket. This would not be taxed then ? For withdrawals of course I need to sell but I already covered that in (2) ?

Is this correct ?

taxable account is simple. This is what I plan to do.
- First of all I could not reset the cost basis in RNOR period because my move to India was unplanned. I could not properly quit UK and spend a good 2 years in RNOR. Last year I was RNOR but also UK national so if I sold taxable assets I would have had to pay capital gains tax in UK.
- This year I still have ties to UK. I will probably be ROR this year as well.
My plan is :
US accounts : Dividends : I will sign W8-BEN form, 25% tax withheld, pay remaining tax to India.
US accounts : capital gains : Only sell to rebalance and pay capital gains tax in India only. Generally try not to sell. US has no capital gains tax for non resident alien
UK Accounts : Dividends : Go for Accumulation units and no dividend generated. But it doesnt seem honest. Also in UK, even for accumulation units we would pay notional dividend. So the honest thing may be to get income units and pay tax to India. UK may not tax non residents
UK Accounts : Capital gains : same as US one above.
sharukh
Posts: 649
Joined: Mon Jun 20, 2016 10:19 am

Re: India Tax on residents on US 401K / IRA / Roth IRA UK Pensions / ISA ?

Post by sharukh »

bluejeansman wrote: Wed May 15, 2024 1:08 pm Thanks for the detailed reply but I kind of lost you on on the first paragraph.

I dont have a US green card or citizenship. I am a non resident alien from US standpoint. I am a British naturalized citizen. Born in India.
Good you dont have to worry about $60k only estate exemption, applicable to Indian citizens.
bluejeansman wrote: Wed May 15, 2024 1:08 pm
UK fully recognizes tax sheltered aspect of US Roth IRA, exactly like USA : dividends, capital gains, withdrawals are not taxed. UK also does not tax Roth conversion. So it made sense to do a $30,000 Roth conversions per year over few years. I started Roth Conversion in Tax year 2013 and finished them all in tax year 2019.

I started Roth contribution around 1999 - 2004 etc. I bought the old "Foolish Four" stocks and they didnt do well. As late as 2011, I had only $11,000 in the account. Right now the value is $300,000 after Roth Conversions.

Lets take an example : And Assume I am 60 years of age. As of 2 months ago, let us say my Roth had a value of 9000 units of a $10 stock each totalling $90,000. This was during RNOR. I sold it all and and bought them back in RNOR. So my cost basis is $10. Now, as ROR, let us say the stock price stays the same but I get a dividend of $200. The dividends are auto invested. So, are you saying I should sell $200 worth of shares (20 shares) and withdraw it immediately ? So I would just pay dividend tax on the the $200 and No special withdrawal tax ?
You are mixing things, think as dividends just end up as cash in your account, no automatic reinvest.
you will have to pay tax to Indian tax system. Not sure if schedule 26a exception is available for Roth ira.
you can use money outside of roth to pay taxes, no need to withdraw.
I said to withdraw dividends to keep it simple.
bluejeansman wrote: Wed May 15, 2024 1:08 pm

Instead Suppose the stock had also doubled the day after dividend generated so its now a $20 stock when I sell. So I should then sell only 10 shares to generate $200 and then pay dividend tax and this time I should also pay also capital gains tax ?

If I leave it as it is and never withdraw and just decide to pay tax from other funds then consider the following scenarios :
1) dividend paid out within the bucket but money not taken out : Only dividend tax to pay (from other funds) ?
2) capital gains realized within the bucket by selling an asset -for relabancing purpose - but money not taken out ? Only Capital gains tax to pay (from other funds) ?
yes, using other funds outside of roth to pay taxes seems good in your case as you are a UK citizen.
bluejeansman wrote: Wed May 15, 2024 1:08 pm
3) Now consider taking withdrawals from the bucket. This would not be taxed then ? For withdrawals of course I need to sell but I already covered that in (2) ?

Is this correct ?

taxable account is simple. This is what I plan to do.
- First of all I could not reset the cost basis in RNOR period because my move to India was unplanned. I could not properly quit UK and spend a good 2 years in RNOR. Last year I was RNOR but also UK national so if I sold taxable assets I would have had to pay capital gains tax in UK.
- This year I still have ties to UK. I will probably be ROR this year as well.
My plan is :
US accounts : Dividends : I will sign W8-BEN form, 25% tax withheld, pay remaining tax to India.
US accounts : capital gains : Only sell to rebalance and pay capital gains tax in India only. Generally try not to sell. US has no capital gains tax for non resident alien
UK Accounts : Dividends : Go for Accumulation units and no dividend generated. But it doesnt seem honest. Also in UK, even for accumulation units we would pay notional dividend. So the honest thing may be to get income units and pay tax to India. UK may not tax non residents
UK Accounts : Capital gains : same as US one above.
Thanks for sharing your taxable plan.

Do you know you might have to file schedule FA to list all your outside of India assets ?
What is your accountant saying about that, How comfortable are you with this ?
Topic Author
bluejeansman
Posts: 293
Joined: Sun Oct 19, 2008 6:50 pm

Re: India Tax on residents on US 401K / IRA / Roth IRA UK Pensions / ISA ?

Post by bluejeansman »

Thanks again Sharukh
You are mixing things, think as dividends just end up as cash in your account, no automatic reinvest.
you will have to pay tax to Indian tax system. Not sure if schedule 26a exception is available for Roth ira.
you can use money outside of roth to pay taxes, no need to withdraw.
I said to withdraw dividends to keep it simple.
Understood thanks. So, from what you are saying, Roth IRA is treated like a taxable account by India, hence India tax needs to be paid on dividends and capital gains as they arise within the account irrespective of whether I withdraw or not.
- Okay, in that case, there should be no separate tax upon withdrawal, correct ?
- The cost basis for the capital gain should be with respect to the last purchase price.

Please help with this sequence of events : Is this how India will tax ?

2001-2002 : NRI : Contributed to Roth IRA : Say $5000
2011 : NRI : Roth value grew to $10,000 - No tax paid to US, UK on this growth
2013 - 2019 : NRI : Converted old IRA to Roth IRA, paid US income tax 12% : Value is now $200,000
2023 : RNOR : Value has grown to $300,000. I sell everything and buy back at $300,000. No money withdrawn yet. No tax paid on growth anywhere (US or UK)
2024 : ROR : I get dividends of $500. Fund has grown to $310000 and I sell but DONT withdraw.
I pay India tax on $500 + $1000 of gain $1500 from external account
Total value in account is $310500. I switch to cash earning 0% interest
2029 : I turn 60 and withdraw the whole $310500 while in India. NO INDIA TAX to PAY now ?
Do you know you might have to file schedule FA to list all your outside of India assets ?
What is your accountant saying about that, How comfortable are you with this ?
So far did not find a good accountant. I am ok with filing required papers as per the law which I must obey.
Good you dont have to worry about $60k only estate exemption, applicable to Indian citizens.
I dont think so. It is not by citizenship I believe. estate tax will be a problem for me if I live in India. I have almost a million $ in US domiciled funds, ETFs etc in taxable and non taxable in US.
https://www.bogleheads.org/wiki/Nonresi ... tate_taxes?
Anyway that is a different topic but one I need to study.

Thanks
prospermore
Posts: 3
Joined: Sat May 18, 2024 9:34 am

Re: India Tax on residents on US 401K / IRA / Roth IRA UK Pensions / ISA ?

Post by prospermore »

What are the best legitimately run companies or ETFs to invest in India for a US citizen?
Also, I didn't want any of the India company owned or doing big business with China.
sharukh
Posts: 649
Joined: Mon Jun 20, 2016 10:19 am

Re: India Tax on residents on US 401K / IRA / Roth IRA UK Pensions / ISA ?

Post by sharukh »

bluejeansman wrote: Thu May 16, 2024 5:26 am Thanks again Sharukh
You are mixing things, think as dividends just end up as cash in your account, no automatic reinvest.
you will have to pay tax to Indian tax system. Not sure if schedule 26a exception is available for Roth ira.
you can use money outside of roth to pay taxes, no need to withdraw.
I said to withdraw dividends to keep it simple.
Understood thanks. So, from what you are saying, Roth IRA is treated like a taxable account by India, hence India tax needs to be paid on dividends and capital gains as they arise within the account irrespective of whether I withdraw or not.
- Okay, in that case, there should be no separate tax upon withdrawal, correct ?
- The cost basis for the capital gain should be with respect to the last purchase price.

Please help with this sequence of events : Is this how India will tax ?

2001-2002 : NRI : Contributed to Roth IRA : Say $5000
2011 : NRI : Roth value grew to $10,000 - No tax paid to US, UK on this growth
2013 - 2019 : NRI : Converted old IRA to Roth IRA, paid US income tax 12% : Value is now $200,000
2023 : RNOR : Value has grown to $300,000. I sell everything and buy back at $300,000. No money withdrawn yet. No tax paid on growth anywhere (US or UK)
2024 : ROR : I get dividends of $500. Fund has grown to $310000 and I sell but DONT withdraw.
I pay India tax on $500 + $1000 of gain $1500 from external account
Total value in account is $310500. I switch to cash earning 0% interest
2029 : I turn 60 and withdraw the whole $310500 while in India. NO INDIA TAX to PAY now ?
That sounds right.

I think you got a bit confused with numbers there. Some times you say 10,000 and one place you say 1,000
sharukh
Posts: 649
Joined: Mon Jun 20, 2016 10:19 am

Re: India Tax on residents on US 401K / IRA / Roth IRA UK Pensions / ISA ?

Post by sharukh »

prospermore wrote: Sat May 18, 2024 10:03 am What are the best legitimately run companies or ETFs to invest in India for a US citizen?
Also, I didn't want any of the India company owned or doing big business with China.
If you are a us citizen and have us broker then just buy INDA etf
prospermore
Posts: 3
Joined: Sat May 18, 2024 9:34 am

Re: India Tax on residents on US 401K / IRA / Roth IRA UK Pensions / ISA ?

Post by prospermore »

I know about INDL for 2x leverage. ETFs tend to have companies I don't want exposure to.
Topic Author
bluejeansman
Posts: 293
Joined: Sun Oct 19, 2008 6:50 pm

Re: India Tax on residents on US 401K / IRA / Roth IRA UK Pensions / ISA ?

Post by bluejeansman »

If you are a us citizen and have us broker then just buy INDA etf
I agree. Otherwise you might get into PFIC issues, right ? As US citizen your only option is US domiciled mutual funds/ETFs. India ETF should give you broad exposure to India market.

prospermore, you are US citizen residing in US, not India right ?
Topic Author
bluejeansman
Posts: 293
Joined: Sun Oct 19, 2008 6:50 pm

Re: India Tax on residents on US 401K / IRA / Roth IRA UK Pensions / ISA ?

Post by bluejeansman »

Sharukh
2001-2002 : NRI : Contributed to Roth IRA : Say $5000
2011 : NRI : Roth value grew to $10,000 - No tax paid to US, UK on this growth
2013 - 2019 : NRI : Converted old IRA to Roth IRA, paid US income tax 12% : Value is now $200,000
2023 : RNOR : Value has grown to $300,000. I sell everything and buy back at $300,000. No money withdrawn yet. No tax paid on growth anywhere (US or UK)
2024 : ROR : I get dividends of $500. Fund has grown to $301000 and I sell but DONT withdraw.
I pay India tax on $500 + $1000 of gain $1500 from external account
Total value in account is $301500. I switch to cash earning 0% interest (just for the sake of discussion, to keep calculation simple)
2029 : I turn 60 and withdraw the whole $301500 while in India. NO INDIA TAX to PAY now ?
I have posted here too.
https://www.reddit.com/r/nri/comments/1 ... th_ira_uk/

It appears that dividends and any capital gains accrued within the Roth are taxed. As Abhinav has clarified : "As regards cost basis, yes the cost of acquisition for capital gain calculation after ROR should be the the stepped up cost basis due to sale/repurchase transaction done during RNOR (which was a non-taxable event then)."

Only question now is about withdrawal hence I made the example above. In the last line : 2029 : I withdraw at 60. NO INDIA TAX right ? I have pasted chatgpt response as well in the reddit thread which is where it gets murky. But chatgpt sometimes confidently gives inaccurate information :-)

What do you think ? Withdrawals taxed, that too as income, on top of the tax on gains and dividends which are accrued ??!! Surely that doesnt make sense.
sharukh
Posts: 649
Joined: Mon Jun 20, 2016 10:19 am

Re: India Tax on residents on US 401K / IRA / Roth IRA UK Pensions / ISA ?

Post by sharukh »

bluejeansman wrote: Sun May 19, 2024 2:21 pm Sharukh
2001-2002 : NRI : Contributed to Roth IRA : Say $5000
2011 : NRI : Roth value grew to $10,000 - No tax paid to US, UK on this growth
2013 - 2019 : NRI : Converted old IRA to Roth IRA, paid US income tax 12% : Value is now $200,000
2023 : RNOR : Value has grown to $300,000. I sell everything and buy back at $300,000. No money withdrawn yet. No tax paid on growth anywhere (US or UK)
2024 : ROR : I get dividends of $500. Fund has grown to $301000 and I sell but DONT withdraw.
I pay India tax on $500 + $1000 of gain $1500 from external account
Total value in account is $301500. I switch to cash earning 0% interest (just for the sake of discussion, to keep calculation simple)
2029 : I turn 60 and withdraw the whole $301500 while in India. NO INDIA TAX to PAY now ?
I have posted here too.
https://www.reddit.com/r/nri/comments/1 ... th_ira_uk/

It appears that dividends and any capital gains accrued within the Roth are taxed. As Abhinav has clarified : "As regards cost basis, yes the cost of acquisition for capital gain calculation after ROR should be the the stepped up cost basis due to sale/repurchase transaction done during RNOR (which was a non-taxable event then)."

Only question now is about withdrawal hence I made the example above. In the last line : 2029 : I withdraw at 60. NO INDIA TAX right ? I have pasted chatgpt response as well in the reddit thread which is where it gets murky. But chatgpt sometimes confidently gives inaccurate information :-)

What do you think ? Withdrawals taxed, that too as income, on top of the tax on gains and dividends which are accrued ??!! Surely that doesnt make sense.
Well, NO INDIA TAX to PAY. That's my understanding too.
Assuming the USD INR rate stays the same.
India taxes based on INR value.
So even if you have the same dollar value in your Roth IRA account, if the Indian rupee depreciates with USD, you will still have to pay taxes to Indian tax system
Topic Author
bluejeansman
Posts: 293
Joined: Sun Oct 19, 2008 6:50 pm

Re: India Tax on residents on US 401K / IRA / Roth IRA UK Pensions / ISA ?

Post by bluejeansman »

Thanks Sharukh. Great point about exchange rate. Good one. I didnt think of that. Thank you.

I am still not sure that Roth IRA withdrawals are NOT taxed as income. chatgpt is also saying it is ambiguous. I have spoken to a few chartered accountants but they have all said "let me find out". Some are agreeing with your and my point, but they are not quoting any article or section number etc. So it does not inspire confidence.

Here is another question : (I have asked the same in the reddit thread as well) : If I become ROR, India will know I have X amount of money in Roth IRA, UK ISA, UK Pension. Let them know. No worries. Next year I become NRI (go back to UK, health permitting or go to Dubai on retirement visa). I can then close all these problematic accounts like Roth, ISA etc. Closing obviously means selling and then closing. There will be no tax in India (NRI), UK (Roth and ISA are recognized tax shelters), or Dubai (tax haven). I return the next year to India and become ROR. Now India will see that money has moved out of those ambiguous buckets to other taxable bucket. Will India penalize me for "aggressive" tax avoidance ? If I go to UK I will have grounds for defense because UK has been my home for 20 years and I may even get a job in UK in my profession. But if I go to Dubai on retirement visa I cannot work and it will be obvious to all and sundry that what I did is tax exile. Will this be considered "aggressive" avoidance ?
Topic Author
bluejeansman
Posts: 293
Joined: Sun Oct 19, 2008 6:50 pm

Re: India Tax on residents on US 401K / IRA / Roth IRA UK Pensions / ISA ?

Post by bluejeansman »

India tax on UK pensions is another nightmare. Looks like unless I do QROPS, I wont get the 25% tax free lumpsum. And I am not interested in Indian QROPS at this time.

makes me want to continue to be RNOR and almost take the drastic step of closing out the Roth, UK ISA and take the taxfree 25% UK pension lumpsum, all tax free events.

I could go back to UK this year to be RNOR but then I get health problems in UK. need to explore warm tax havens / digital nomad work. Lets see ...
sharukh
Posts: 649
Joined: Mon Jun 20, 2016 10:19 am

Re: India Tax on residents on US 401K / IRA / Roth IRA UK Pensions / ISA ?

Post by sharukh »

bluejeansman wrote: Mon May 20, 2024 12:45 pm India tax on UK pensions is another nightmare. Looks like unless I do QROPS, I wont get the 25% tax free lumpsum. And I am not interested in Indian QROPS at this time.

makes me want to continue to be RNOR and almost take the drastic step of closing out the Roth, UK ISA and take the taxfree 25% UK pension lumpsum, all tax free events.

I could go back to UK this year to be RNOR but then I get health problems in UK. need to explore warm tax havens / digital nomad work. Lets see ...
I don't see how closing out Roth will help you even if RNOR
Topic Author
bluejeansman
Posts: 293
Joined: Sun Oct 19, 2008 6:50 pm

Re: India Tax on residents on US 401K / IRA / Roth IRA UK Pensions / ISA ?

Post by bluejeansman »

I don't see how closing out Roth will help you even if RNOR
Well, RNOR means : Selling, taking money out, and taking it all out will NOT be a taxable event in India.

After that, once I become ROR, no need to worry about Roth which won't exist. Now, of course you did clarify my questions about Roth IRA : that dividends and gains within the Roth are taxed by India just like a normal taxable account but withdrawals are not. But I'm not 100% sure. chatGPT links are saying the rules are ambiguous and open to interpretation. What if India starts taxing Roth IRA withdrawals at Income tax rates on top of the taxes on accrued dividends and capital gains ? That is unlikely but chatgpt's response is worrying : https://www.perplexity.ai/search/do-Ind ... GU7ybRSm3A

Hence my thoughts on closing out such problematic international tax shelter accounts before becoming ROR in India.

Hope I've explained it ...Thanks
codedude
Posts: 86
Joined: Thu Jan 26, 2017 8:15 pm

Re: India Tax on residents on US 401K / IRA / Roth IRA UK Pensions / ISA ?

Post by codedude »

Hi bluejeansman,

In ROR, there are only two kinds of foreign accounts - 1. Taxable 2. Tax deferred (like US 401ks/IRAs).

Roth IRAs fall into the taxable account category (unfortunately). All dividends and capital gains are taxable in the same tax year.
Since these are taxed annually, there should be no tax upon withdrawal.

For tax deferred accounts like 401ks/IRAs, one can choose to defer India taxes till he/she becomes a non resident again. If one withdraws from these accounts, then it will be taxable both in the US and India in the same year, so one can claim double taxation avoidance.

One can choose to also not defer and treat the 401k/IRA as a taxable account for purposes of India tax and pay tax on dividends and capital gains (this is the default option if one does not file a particular form choosing to defer).
sharukh
Posts: 649
Joined: Mon Jun 20, 2016 10:19 am

Re: India Tax on residents on US 401K / IRA / Roth IRA UK Pensions / ISA ?

Post by sharukh »

codedude wrote: Tue May 21, 2024 5:39 pm Hi bluejeansman,

In ROR, there are only two kinds of foreign accounts - 1. Taxable 2. Tax deferred (like US 401ks/IRAs).

Roth IRAs fall into the taxable account category (unfortunately). All dividends and capital gains are taxable in the same tax year.
Since these are taxed annually, there should be no tax upon withdrawal.

For tax deferred accounts like 401ks/IRAs, one can choose to defer India taxes till he/she becomes a non resident again. If one withdraws from these accounts, then it will be taxable both in the US and India in the same year, so one can claim double taxation avoidance.

One can choose to also not defer and treat the 401k/IRA as a taxable account for purposes of India tax and pay tax on dividends and capital gains (this is the default option if one does not file a particular form choosing to defer).
Any idea on how unrealized gains are treated if one becomes a non resident again. Will the unrealized gains be taxed ?
That question is for both taxable and tax deferred accounts.
Topic Author
bluejeansman
Posts: 293
Joined: Sun Oct 19, 2008 6:50 pm

Re: India Tax on residents on US 401K / IRA / Roth IRA UK Pensions / ISA ?

Post by bluejeansman »

codedude

Thanks for your eloquent response. Great clarity there thank you so much. Your point regarding Roth IRA being treated like a taxable account hence no special tax upon withdrawal makes sense, however I am not convinced that is the law. The chatgpt response above is certainly worrying. if we can find any citation or section of Indian tax code that explicitly mentions this, that would be great. All it needs to say is : US Roth IRA and UK ISA are treated exactly like taxable accounts and not like "retirement" accounts.

Taking my example again : I have say a $300,000 worth during RNOR which I sell and re-purchase during RNOR timeframe to reset the cost basis. During my first year in ROR, lets say I get $500 in dividends and $1000 in capital gains and I sell everything, pay tax on $1500 and my Roth IRA now has $301500. For the sake of discussion lets say I am 60 years old now. I pull out $30,000 immediately. Who is to say India wont ask me to pay income tax on $30,000 on top of the tax on $1500 that I already paid ? Some beureucrat / govt babu may look at Roth IRA and conclude it is a "retirement account" because it has the word "IRA" in it ?

Now let us say I am fine with the above too. I learn an (expensive) lesson, pay the income tax on $30,000, jog on, and then move abroad to Dubai or Malta or some tax holiday place but I am too old to find a job. I stay a full year there, close out the $271500 in the Roth completely and return to India and become ROR. Can India now say "What you did last year in Dubai/Malta is extreme tax avoidance, you have no job or career or family or home there, you went there only to quaff champagne and escape tax", ask me to pay income tax on $271500 ? This would be my worst horror.

I may be crazy and paranoid but dont want to end up in some "Bluejeansman vs Indian Revenue Service" landmark case and have to pay some Ram Jethmalani Rs 1 lakh (1000 GBP) per hour to defend my case.

At least for 401k/Rollover IRA the rules seem to be quite clear. As per Sec 89a, you file Form 10-EE and defer the taxes. Done.
Topic Author
bluejeansman
Posts: 293
Joined: Sun Oct 19, 2008 6:50 pm

Re: India Tax on residents on US 401K / IRA / Roth IRA UK Pensions / ISA ?

Post by bluejeansman »

Any idea on how unrealized gains are treated if one becomes a non resident again. Will the unrealized gains be taxed ?
That question is for both taxable and tax deferred accounts.
Great queston Sharukh.

Thats kind of my question too. So you build up a gain in taxable or tax-sheltered, dont sell while ROR (ROR1), go abroad and become NR and sell. On the taxable account you will pay tax in your chosen country but not for Roth. Now you come back to India as ROR (ROR2). Will India ask you to pay the tax on the gain because the gain was accrued during ROR1 ? I doubt it. I would argue that the taxable event did not occur in ROR1, it occured during NR.

But then this means that an OCI cardholder can keep taking tax holidays every so often and become NR to crystallize gains on Roth IRA. if the amounts are large I wonder if India can crack down and call it extreme avoidance. If you have a job abroad maybe your defense may be strong. But if it is an obvious tax holiday I seriously dont know what India does.
Topic Author
bluejeansman
Posts: 293
Joined: Sun Oct 19, 2008 6:50 pm

Re: India Tax on residents on US 401K / IRA / Roth IRA UK Pensions / ISA ?

Post by bluejeansman »

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.
meghdeep
Posts: 1
Joined: Sun Jun 16, 2024 5:29 pm

Re: India Tax on residents on US 401K / IRA / Roth IRA UK Pensions / ISA ?

Post by meghdeep »

Hi bluejeansman - Thank you for raising this question and then following-up with your findings. I am in the US and just beginning to work on my retirement planning. The possibility of moving back to India is holding me back to put money in Roth IRA. It seems that 401(k) is fine since it's tax deferred anyway and the DTAA will help at the time of withdrawal if I happen to be in India when I am 59.5+. I have the same concerns as what you called out for Roth IRA.

Did you get any additional information/clarification from the Indian tax advisor you consulted? Based on your last post, it seems he/she was going to speak with a few other experts to get a more definitive answer.

I have been trying to search for answers and read other forums. I came across this - https://www.thegalacticadvisors.com/post/401k-ira-india. As per the PDF on this page, in regards to Roth IRA post 59.5 age, lump-sum withdrawal are taxable as capital gains and monthly withdrawals are taxable as per the income tax slab. Both of these defeat the purpose of investing in Roth IRA. You may have seen it already but I am curious what you thoughts are.
Topic Author
bluejeansman
Posts: 293
Joined: Sun Oct 19, 2008 6:50 pm

Re: India Tax on residents on US 401K / IRA / Roth IRA UK Pensions / ISA ?

Post by bluejeansman »

meghdeep I did not get additional clarification. Its hard to reach this particular advisor because he is super busy I suppose.

Altho I dont have it in writing, I took notes and the message I got was what I mentioned above : That Sec 89a will apply to UK, US, Canada and the article promises the same tax treatment on the "retirement accounts" as they are treated in the respective country. I did remind him during the call that Roth IRA is funded with after tax dollars and US does not tax growth/accruals or withdrawals. He said India is likely to respect the same and you just file form 10-EE. But it is a grey area and it appears that nobody knows for sure.

Planning to meet another "senior tax lawyer" in Chennai. Hopefully he will be able to shed light. My fear in India is : no one seems to be absolutely sure of anything. For example look at any of the posts by TedSwippet on this forum. He would cite impeccable references. So far I have not found that kind of authority / clarity with any of the Indian tax folks. I have spoken to at least three.
I have been trying to search for answers and read other forums. I came across this - https://www.thegalacticadvisors.com/post/401k-ira-india. As per the PDF on this page, in regards to Roth IRA post 59.5 age, lump-sum withdrawal are taxable as capital gains and monthly withdrawals are taxable as per the income tax slab. Both of these defeat the purpose of investing in Roth IRA. You may have seen it already but I am curious what you thoughts are.
Top
I should have clarified / asked this point specifically. But the person I spoke to may not have seen that link.

I fear I will not know this for sure. Only when I settle down in India I may know it the painful way. If that happens I plan to test the waters by selling small bits of US Roth IRA, UK ISA, withdraw small amounts and go thru the tax treatment. If the treatment is draconian, then I may become non resident again, health permitting, staying less than 6 months in India. If I do decide to retire in India, I will try taking one last holiday to one of those tax havens and close all these tax sheltered accounts.

let me validate what my last week's advisor has said with this new tax lawyer. It will take considerable time and money to get to the bottom of this. There was one tax expert who used to charge a fortune and post on r2iclubforums. I forgot his contact details. Not sure how to get hold of him.
Topic Author
bluejeansman
Posts: 293
Joined: Sun Oct 19, 2008 6:50 pm

Re: India Tax on residents on US 401K / IRA / Roth IRA UK Pensions / ISA ?

Post by bluejeansman »

I asked the tax advisor I spoke to regarding the above.

He opined that the article is probably not updated and extracted Rule 21AAA from Sec 89a for my reference. Not sure I fully understand it tho' ..

[Taxation of income from retirement benefit account maintained in a notified country.]
21AAA.

(1) Where a specified person has income accrued in a specified account or accounts, during a previous year relevant to any assessment year beginning on or after the 1st day of April, 2022, such income shall, at the option of the specified person, be included in his total income of the previous year relevant to the assessment year in which income from the said specified account or accounts is taxed at the time of withdrawal or redemption, as the case may be, in the notified country.

(2) Where the option has been exercised by a specified person under sub-rule (1), the total income of the specified person for the previous year in which income is taxable under sub-rule (1) shall not include the income which,—
(a) has already been included in the total income of such specified person in any of the earlier previous years during which such income accrued and tax thereon has been paid in accordance with the provisions of the Act; or
(b) was not taxable in India, in the previous year during which such income accrued, on account of,—
(i) such specified person being a non-resident, or not ordinarily resident referred to in clause (6) of section 6, during that previous year; or
(ii) application of the Double Taxation Avoidance Agreement, if any,

and the foreign tax paid on such income, if any, shall be ignored for the purposes of computation of the foreign tax credit under rule 128.


Wanted to share here. Thanks.
Topic Author
bluejeansman
Posts: 293
Joined: Sun Oct 19, 2008 6:50 pm

Re: India Tax on residents on US 401K / IRA / Roth IRA UK Pensions / ISA ?

Post by bluejeansman »

On another note, I seriously doubt that India will recognize the tax sheltered nature of UK ISA. I brought up the fact to the tax advisor that it is similar to Roth IRA in that after-tax dollars goes in, growth and withdrawal are not taxed. And the tax advisor just said that in that case Section 89a should cover it as well since it pertains to US, UK, Canada.

But there are always nuances. I will bet a good sum of money that India will treat ISA like a normal taxable account. 3 reasons :

1. the word "retirement" does not appear in it. (Unlike Roth IRA where the R in IRA stands for retirement)
2. You can take money out of ISA anytime. Indian Babus will then argue that it is certainly not meant to fund retirement per se but just a special UK benefit that India is not obligated to recognize.
3. USA does not recognize UK ISA and treats it just like a taxable account and India likes to copy the US

So, nobody knows. I am further hamstrung by the fact I may not be able to change my fund choices once I am offshore to UK. I should probably assume it is a taxable account so far as India is concerned. can opt for Accumulation units so no tax is due until I sell. But I would have to occasionally sell to re-balance, and that sale will attract income tax since India treats foreign mutual funds like deposits/CDs. Almost tempted to go for Vanguard LifeStrategy (say 60/40 or 40/60) Accumulation units. So I would not need to sell for the sake of rebalancing.

But not sure UK Bias is a good thing for someone moving to India. Or even for the British for that matter. The old pre-Brexit Britain when the pound was at $2 ? Absolutely. But now ? Only time will tell ...

Thanks.
Post Reply