High-Tax Country Resident Planning To Go Offshore: India

If you are resident and domiciled in India (which will be the normal situation for a native-born Indian individual) then you are taxable on your world-wide income and capital gains. You will also be subject to wealth tax.

Many resident individuals will be participating in domestic Indian tax-privileged savings and investment instruments, and usually these can simply be discontinued on leaving without serious tax penalties.

Residence applies to individuals who:

• spend more than 182 days in the country in the tax year; or
• spend more than 60 days in India during a tax year plus more than 365 days in the country in the previous four tax years.

Other individuals are non-resident.

A not ordinarily resident person is one who has been non-resident in nine out of the previous ten years and has not spent more than 729 days in the country during the previous seven tax years.

To lose tax residence it is simply necessary to stop fulfilling any of the above criteria in a given tax year.

Resident individuals are taxed on their worldwide income; non-resident and not ordinarily resident individuals are taxed only on their local-source income.

In 2010, the first INR160,000 of income is free of tax; between that level and INR500,000 the rate is 10%; then 20% up to INR800,000; then 30% on income above that level. A 10% surcharge was due on income over INR1m until was removed from 2009/10. However, income is subject to a further 3% education 'cess'.

Some types of employee benefit are exempt from tax, including medical expenses and rent allowances.

Capital gains from most types of listed securities are taxed at 15% (short-term gains); longer-term gains are exempt. Short-term gains on other types of securities are taxed as regular income; longer-term gains are taxed at 20%, and the same rate applies to capital gains on other types of asset. An amended Direct Tax Code presented in June 2010 proposes reforms to the capital gains tax system so that the distinction between short- and long-term gains is largely removed. This would bring some previously exempted transactions into the tax net.

Dividends from Indian companies are normally exempt from taxation in the hands of an individual recipient, but are subject to Dividend Distribution Tax at 15%, plus a 3% education surcharge. An additional 7.5% surcharge is due if total tax due is more than INR10m.

There is a wealth tax, charged annually at 1% of assets held in India in excess of INR3m. There is no alternative minimum tax and no inheritance tax.

Although some revenue protection measures apply to countries having "preferential" tax regimes, these apply mostly to the corporate sector, and general anti-avoidance legislation has not progressed far in India for individuals; offshore trusts or other corporate forms are therefore generally speaking quite effective at sheltering many types of asset.

For an individual who knows she is going to leave India, there is therefore a case for switching income-generating assets into capital appreciation assets in a country outside India, or at any rate for ensuring that gains are not made during Indian residence which could incur capital gains tax. Gains which crystallise after residence has finished will escape Indian tax.

Once Indian residence has been terminated, and if non-residence is expected to be permanent, then an ex-Indian resident is free to invest offshore in order to obtain the best possible returns.

Once a definite decision to move offshore has been made, careful thought should also be given to existing Indian capital assets, including pension assets. Will it be possible to move them offshore without incurring capital gains tax? Is it desirable to move them early and pay the tax anyway? These are complex questions, and the answer will depend on individual circumstances, but for many individuals there will be interesting tax planning possibilities.

www.lowtax.net contains extensive information on the investment, tax and legal regimes in 50 of the main offshore jurisdictions. Further information is available in our Investment Information Providers Section, and the four main types of offshore investment are described in the Guide to Offshore Investment on this site.

NB: The suggestions given above do not constitute investment advice. They are intended only to assist individuals in finding appropriate professional advice, which is essential for anyone planning offshore investment.