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

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Topic Author
bluejeansman
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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.
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