Private Client Tax in India... From the Secret Private Client Files
Background
The scene is set in a bustling hotel lobby in Mumbai. The crowd is excited as it is just hours before
Mumbai Indians crucial game in the
Indian Premier League ("IPL").
The interviewer, Our Chief Tax Native, and the interviewee, Secret Adviser in India, are seated on a comfortable sofa, sipping coffee.
There's a background hum of activity—guests checking in, a receptionist arguing with a new guest, and a cleaner fussing over something nearby. Secret Adviser seems relaxed, while Tax Natives appears focused on their questions.
Tax Natives
[Leaning forward with a notepad in hand]
Good morning, Secret Adviser. Let's talk about taxes in India. What are the basic principles of taxation there?
Secret Adviser
[Sips coffee]
Good morning, Tax Natives. In India, the Income-tax Act, 1961, governs personal taxation. Generally, Indian residents are taxed on their worldwide income, while non-residents are taxed only on income that originates in India.
Tax Natives:
[Frustratingly shakes their pen] I see. So, how is a person's residential status determined for tax purposes?
Secret Adviser:
[Leans back, relaxing]
It depends on their physical presence in India. You're considered a resident if you're in India for at least 182 days during a financial year, or 60 days during a financial year and 365 days in the previous four years.
But there are exceptions, especially for those who leave India for work or visit India from abroad.
Tax Natives
Now, what's this about the new income tax regime in India? I heard it's quite different from the old one.
Secret Adviser
[Nods] Yes, it's a major shift. The new regime offers lower tax rates if you give up certain tax deductions and exemptions.
From April 2023, it's the default regime, but taxpayers can choose the older one if they prefer.
It's aimed at simplifying the tax structure and is particularly beneficial for high-net-worth individuals due to lower surcharge rates.
[Meanwhile, the receptionist is in a heated argument with a new guest about a booking mix-up.]
Tax Natives
Busy morning here! Let's talk about the recent changes in tax rates. I heard there's a reduction in the surcharge for the super-rich?
Secret Adviser
Yes, from April 2023, the surcharge rate was reduced from 37% to 25% for those earning over 50 million rupees.
This has lowered the effective tax rate from 42.74% to 39%, which is significant for high-income individuals.
Tax Natives
[Writes down notes...or makes a doodle]
That's quite a relief for them. What about capital gains? Any new changes there?
Secret Adviser
[Nods]
There's a cap on the exemption for long-term capital gains from the sale of residential property. If the gains exceed 100 million rupees, they are now taxable. This cap was introduced from April 2023 to prevent excessive tax breaks.
[The tourist returns, holding a map upside down, clearly still lost. Tax Natives and Secret Adviser point him in the right direction, and he leaves with a smile.]
Tax Natives
[Smiling] He'll get there eventually. Now, what about gift and succession taxes? Are those coming back?
Secret Adviser
[Shakes her head]
Not quite. India doesn't have succession or inheritance tax, and gift tax was abolished in 1998.
However, there's a deemed gift tax in the income tax regime. It applies to money or property received without consideration or at an undervalue.
Recent amendments made it clear that gifts received by non-residents or RNOR from Indian residents are taxable in India.
[The receptionist's argument with the guest reaches a resolution, and there's a round of applause from the lobby staff.]
Tax Natives:
[Grinning] Looks like things are calming down. One last question: how does India deal with cross-border structuring and regulatory issues for HNIs?
Secret Adviser
[Leans in] India has an extensive network of tax treaties with various jurisdictions. There’s also the Black Money Act, which addresses undisclosed foreign income and assets.
It's been a big tool in tackling tax evasion, granting authorities wide-ranging powers to investigate.
In terms of entrepreneurs and private trusts, the abolition of the dividend distribution tax in 2020 changed things, and the
'angel tax' now applies to share premiums exceeding fair market value, even for non-residents.
Tax Natives
[Nods] Thanks for the detailed explanation, Secret Adviser. Enjoy your coffee, and watch out for that tourist!
Secret Adviser
[Laughs] Thanks, Tax Natives. I'll keep my eyes peeled!
Final thoughts
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