High-Tax Country Resident Planning To Stay Put: 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.

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.

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.

NB: The Indian tax rules are considerably more complicated than the above simplified summary, and professional advice on the situation of any particular individual is a necessity.

Although some revenue protection measures apply to countries having "preferential" tax regimes, general anti-avoidance legislation has not progressed far in India, and offshore trusts are generally speaking quite effective at sheltering many types of asset.

The availability of domestic tax-privileged investment instruments in India means that for many individuals it will be necessary to balance the advantages of domestic investment against the superior returns that may be achievable offshore.

Pensions investment can also include an offshore element, although the tax advantages of pensions have been steadily eroded vis-à-vis other tax-efficient investments, which are more flexible. In particular, for high earners, the pension provisions over and above that allowed for tax purposes have often been invested in offshore Funded Unrecognised Retirement Benefit Schemes (FURBS). The foreign (offshore) life assurance sector has been particularly innovative in these types of product.

For an individual wishing to explore the investment opportunities further afield, www.lowtax.net contains details of the investment and tax regimes for 50 offshore jurisdictions.

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.