Saving tax on investment abroad

In the recent past, there is an increasing trend of Indians returning to India as part of their post retirement plan. The oft considered retirement destinations include Bhubaneswar, Jaipur, Lucknow, Chandigarh, Nagpur, Ahmedabad, Vadodara, Coimbatore, Vishakapatnam, and Kochi. In most cases, the returning Non-Resident Indians (NRIs) would seriously be evaluating the option of disposing of investments held by them outside India, including real estate.

In most cases, whether or not to sell the property prior to their return to India is a crucial decision. Many of them sell primarily because the gains arising from disposal of such investments would not be taxable in India. Is this the correct position under law

Implications under domestic tax law In a scenario where a returning NRI qualifies as a “resident and ordinarily resident” under the domestic tax laws, the gains arising from disposal of such real estate investment held by him outside India would be subject to tax in India. In all other cases, assuming the sale proceeds are credited to a bank account outside India (though subsequently transferred to India) at the first instance, the returning NRI would not be liable to tax in India on such gains.

Does it imply then that if a returning NRI qualifies as “resident and ordinarily resident”, he would be liable to tax on the gains arising from disposal of such real estate investment held by him outside India under all circumstances The answer is NO.

Implications under the tax treaty Under the Indian tax laws, a tax resident in India could choose to be governed either by the provisions of the Income-tax Act, 1961 (“IT Act”) or a Double Taxation Avoidance Agreement (“DTAA”), if India has entered into such a treaty with the country concerned. Consequently, assuming that the DTAA has a beneficial tax treatment, the same would override the provisions of the IT Act. This doctrine of “treaty override” has been upheld by the Supreme Court in various rulings.

In this context, it would be pertinent to note that certain tax treaties provide that India does not have the right to tax gains arising from alienation of immoveable property held in such other state. Hence, it is imperative that the tax payer assiduously evaluates the provisions of the extant tax treaty.

The writer is Executive Director, Moat Family Office, Kochi