The Ventura Pranas Quarterly Newsletter: April – June 2021
I hope this newsletter finds you well.
At the risk of sounding repetitive, I’d like to express my gratitude and thanks to our clients and our team for staying steady and holding things together during this second wave. By now Covid-19 has touched us all in a tragic and frightening way – either personally or through someone close to us.
Ventura Pranas will continue our work-from-home format for the next two quarters until our team can return to our office, but since we set this process up early last year, meeting deadlines will not be a problem.
You will hear from our team on upcoming deadline paperwork. Although India deadlines have been extended, we will continue to work on them keeping the original July 31 deadline as the primary marker. We would like to do this to avoid the rush of India work in the midst of the US extended deadlines on September 15th and October 15th. Please send us what you have ready so we can begin all the preliminary work and pace ourselves between now and the deadlines for the next few months. We understand that you may not have received the final Form 16s from your employers, but do not let that hold you back from sharing what you have.
- September 15, 2021 – US Corporates on extension
- September 30, 2021 – Indian Individual Tax return deadline
- October 15, 2021 – US individuals on Extension
- December 15,, 2021 – US individuals abroad on Extension
- December 31, 2021 – US Projections (Tax and BK)
- Month end – June to December
- Quarter end – June 30, September 30, December 31
- Books for US corporate deadline (August)
- Books for US Projections (October and November)
You Ask, We Answer (real estate and tax planning).
Through questions from our clients and more that we anticipate you will have, we’ve put together information on tax planning and real estate for you.
Q: I am an Indian citizen and Indian resident, holding long term exercised stock in a US company. Where do I file my taxes?
A: Well, you might have to file taxes in both countries, but first file in India. Then, if you spent more than 183 days in the US you will need to file and pay taxes in the US as well, but If you did not you just will file in the US ( a form 1040NR) but you won’t have to pay tax. You will only owe India tax on the capital gains.
Q: What tax savings strategies in India can I avail?
A: Since this is a sale of a capital asset other than real estate you can consider countering the tax in India by way of Investment under section 54F. This section under the Indian Income Tax Act allows you to sell a foreign long term asset that is not real estate and avail tax savings in India. You will need to ensure that the proceeds from the sale are put into the capital gains account by the due date of the return in case your investment date goes beyond. The section generally allows you to invest within 2 years in the purchase of a residential property or to construct one up to 3 years after the sale. In doing so, the capital gains is exempt in the same proportion that the monies invested in the replacement property bear to the total sale proceeds from the property sale transaction. There are some other conditions. If you think you will be engaging in this type of transaction, reach out and we will provide additional guidance.
Q: Can I invest under section 54EC?
A: No. Section 54EC says you can only avail savings under the section if the subject property sold was land or building or both, not when it is any other long term asset.
Q: What are the reinvestment conditions under section 54F?
A: Section 54F of the Indian Tax Act allows an exemption on capital gain from sale of any property other than a residential house. This exemption is subject to certain conditions. Namely, the taxpayer should invest the net sale proceeds of the property in purchase of a new residential house.
Caveats and conditions to keep in mind are:
- Only Individual and HUF (Hindu Undivided Family) are eligible.
- The LTCG (Long Term Capital Gains) arising from sale of any capital asset other than residential house.
- The reinvestment is in a residential property.
- If it is construction, the new property is constructed within 3 years from the date if sale.
- If it is purchase, the new property is purchased within 1 year prior or 2 years after the date of sale.
- The assessee who claims the 54F exemption does not own more than one residential house other than the new investment as on the date of transfer.
- The purchase any residential house other than the new investment property for 1 year from the date of sale is not permitted.
- The construction of any residential house other than the new investment property for 3 year from the date of sale is not permitted.
- Exemption is calculated as follows:
54F Exemption = Investment in the new property * Long Term Capital Gain / Net Consideration If the investment is more than the net consideration, exemption is limited to Long Term Capital Gain.
- The newly purchased property needs to be held for at least 3 years from the date of investment.
Q: If I sell stock over 2 Financial Years, can I use the proceeds for the same property so in essence avail 54F in two tax years but for the same property investment?
A: Based on the case law ACIT New Delhi v Mahinder Kumar Jain IT APPEAL NO. 5254 (DELHI) OF 2014, there is no bar in section 54F for claiming deduction second or third time by way of successive years of sale of a capital gains property so long as the cost of the replacement property is less than or equal to the capital gains arising to the taxpayer in multiple assessment years. In the above case the total capital arising to the taxpayer in all the three years 2009-10 to 2011-12 was less than the cost of construction of the residential property at Mehendi Farms, New Delhi.
Q: In computing the days, when I sell stock, what date counts?
A: For Indian tax purposes - In computing days (period of holding) to make it long term capital gain, you need to hold the foreign shares for more than 24 months. For example, if you acquire share on 22 June 2021, these shares become long term asset on or after 22 June 2023.
The Time limit for construction / acquisition is explained with an example.
If the date of transfer of original asset is 22 June 2023, the construction of the new property needs to completed between 22 June 2023 to 21 Jun 2026.
If it is investment through purchase of new property, the purchase needs to happen between 23 June 2022 to 22 June 2025.
Q: If I am unable to make the payment by the due date of the return, what should I do?
A: If you are not able to make the investment before filing the return, you could deposit the funds into a capital gains account and such return shall be accompanied by proof of such deposit.
Q: What happens if I put money in the CG (Capital Gains) account and never use it for the property purchase?
A: If the money deposited in the Capital Gains account is not utilized within 3 years, the amount unutilized in the capital gain account will be added as taxable capital gain at the expiry of 3-year period.
Q: I am a US citizen selling Indian stock and have capital gains in India, what tax savings can I adopt?
A: You could investment in 54F and exempt the capital gains from tax. The details of section 54F is discussed in detail in the earlier question on reinvestment conditions under 54F.
Q: Can I also avail the same tax savings in the US?
A: No. Investment under section 54F is not eligible for tax saving in USA. If you are a US citizen, bear in mind that your capital gains from the sale of US stock will have to be offered to taxation in the US unlike a non resident alien. Therefore you should look into options that the US provides to shield capital gains not Indian rules.
Q: Can I get a credit for taxes paid in India for US federal tax purposes?
A: Yes, the taxes paid in India is eligible for foreign tax credit. However, if you claim exemption in India, there may not be enough foreign tax credit on your US return. If you have enough Passive foreign tax credit carryover from prior year or current year from other passive source, you could use the credit against the capital gains computed on the Indian capital gains.
Q: Will I pay any tax out of pocket to the feds?
A: You may have to pay additional taxes out of pocket towards the following:
- Net Investment Income Tax (3.80% on the capital gains)
- US Income tax net of Foreign (in this case Indian) Tax Credit (if the foreign tax credit is less than US tax on capital gains)
Q: What about state taxes? Will I owe state tax?
A: If you are a resident of a taxable State in USA, the Indian capital gains are taxable in the state (according to the State law). If the state allows foreign tax credit on capital gains, the same can be claimed. However most states do not honor any tax credits especially paid abroad.
Q: What are my options to mitigate state tax?
A: If you are resident of state which does not tax their residents (like TX, WA, FL, AL, NV, TN) you could avoid state taxes. If you are a resident outside USA, state taxes will not apply. If you are a part year or nonresident filer for a particular state there may be options to avoid capital gains so long as they are sold when not deemed to be a resident of the state. Please talk to your tax advisor in case you have a shot at filing as a part year or non-resident before you pull the trigger on your sales.
Stories and scenarios you can relate to, for families in the US and in India, to help you understand the complexity (and humour) involved in financial planning. Please note that the following is simply a case study. Any references to names and situations are entirely coincidental.
This issue, we focus on the application of Section 54F (exemption from capital gains with certain conditions met), and how it can impact taxpayers in India who are non US citizens holding stock in a US company.
Hiten grew up in Himachal, but after his graduate studies in Delhi, soon found himself in Bangalore working for a US automobile company with a research-and-development centre in Bangalore. Through the same company, he went to the US in 2009. He stayed on in the US until 2017, although in between he switched jobs a couple of times. In 2017, he decided to move back to India to raise his young children. He remained on a nonimmigrant visa and did not apply for a Greencard as he always knew he wanted to return to India.
While Hiten worked in the US, he was allotted stocks in a company. He exercised these shares and paid in the grant price when he had a sense that he would leave for India soon. Within a few years of shifting back to Bangalore, his base in India, the company went public in 2021. Hiten made capital gains from the sale as he met all the holding conditions that relate to an Incentive Stock Option (ISO). The sale resulted in long term capital gains in both US and in India.
In India the holding period for foreign stock is 2 years. Hiten met this criteria as well. Since Hiten now lives in India and has spent less than 183 days in the US during the year that the company went public, all the capital gains get taxed in India. He has no federal or state liability, but Indian long term capital gains tax can be as high as 28.5%.
What can Hiten do to mitigate taxes? Hiten could invest in 54F property.
Section 54F of the Indian Tax Act allows an exemption on capital gain from sale of any property other than a residential house. This exemption is subject to certain conditions. So essentially, Hiten could invest in property that allows taxpayers who sell and make any long term gains abroad, save on capital gains taxes in India.
The capital gains from the property sale is exempt only in the proportion of the sale proceeds ploughed back into the repurchase of the new property. Hiten would need to hold this property for 3 years and not purchase any other property invoking provisions of section 54F for another 3 years. Also, because all of this stock was purchase out of funds earned during his US residency days, all of the proceeds can be left in the US.
Contrast Hiten’s situation with Mark Singh, a US citizen who was living in India from 2005- 2016 and he was holding stock in an Indian company. Mark was married to an Indian resident for many years, and a couple of years after they parted ways, he decided to move back to the US. Mark exercised his stocks before he moved back to Colorado in 2016.
In the US, Mark’s holding conditions for long term (i.e. 12 months from exercise) is met, and in India (2 years from exercise in the case of an unlisted stock) is also met. When capital gains occurs for Mark, he has to first file in India (in other words, the gains has to be offered to be taxed in India first) before he files in the US.
In India he can invoke the savings under section 54F, but the same won’t yield savings in tax in the US. He will still have to pay the tax in the US at a federal level and if he stays in a taxable state (which Colorado is), then he will have to pay a state tax too. He might be better off, therefore, to sell in India, pay tax in India and use the credits against the US taxes. Mark Singh will still have to pay NII (Net Investment Income) tax of 3.8%, but that’s still a better outcome than paying a whopping 23.8% at a federal level plus the state taxes of 6% over and above the investment in India to meet the specifications of 54F. Mark might just find himself in a bit of cash crunch and still ends up paying close to 30% in US taxes.
Capital Gains (Here’s now Biden’s new proposal might impact you):
The upcoming change in capital gains rates in the US might affect you if you have property in India. Next year, it’s very likely that the Biden administration capital gains proposal goes through, which means that the capital gains rate is going to up to ordinary rates once someone’s income exceeds $1 million. So if you take an individual is going to sell even property in India that’s worth over a couple of million dollars of gains, he’s going to be paying the US tax of 43% versus the Indian capital gains rate that’s 28.5%. If that might be you, this is the time to sell. If you’re not going to sell, then making some transfers well before the date of sale (or rather, well before next year) maybe one to consider.
How the IRS looks at the Indian HUF (Hindu Undivided Family), and why you might need to watch out for throwback tax.
Throwback rules are subject to earnings accumulated in a foreign trust for the benefit of US persons to US taxes at the time of distributions. The steps to compute the tax are cumbersome, and can attract significant interest charges which completely negate the perceived benefits of accumulating the income overseas.
There are numerous entities from place to place which, because they have or may have U.S. persons as settlors or beneficiaries, may call for trust classification analysis under the regulations. The IRS has recently stated its position on India's Hindu Undivided Family (HUF).
The “Hindu Undivided Family” (HUF) is a fascinating legal construct commonly used by high-net-worth families in India, and depending upon the circumstances it may be best seen as a “trust” under the regulations as well. The HUF is recognized under India's Income-Tax Act, and consists of persons lineally descended from a common ancestor and includes their wives and unmarried daughters (the daughter, on marriage, ceases to be a member of her father's family and becomes a member of her husband's family). Management of the property of the HUF is performed by the head of the family or karta (traditionally male, but recently the law has been reformed to allow female). The law states that the joint and undivided family is “the normal condition of Hindu society” and the presumption is that “the members of a Hindu family are living in a state of union, unless the contrary is established.” Thus, the HUF is a legal tax entity separate and distinct from individuals and corporate entities recognized by Indian tax law. While all other entities recognized in corporate and individual income tax laws are defined on the basis of company law, the HUF as a legal entity in Indian tax law is defined on the basis of Hindu personal law. Although to date there is no U.S. federal authority concerning classification of a HUF under the regulations, the nature of the entity is, in many ways, analogous to a trust, and thus, it has been posited that a HUF can be treated as a trust, the karta as a trustee (though whether a karta can be a “grantor” is subject to serious question because under Indian law the karta cannot contribute property to the HUF), the “coparceners” as the beneficiaries, and so forth. Thus, for example, a coparcener that is a U.S. citizen or a non-citizen U.S. resident (under the green card or substantial presence test) may have federal income tax obligations under the “throwback tax” rules on distributions from the HUF. (reference/ source Bntax.com)
If taxpayers had however subject income from an HUF as they would a partnership interest, you would not have to face the consequences of Throwback.
On Estate Planning (it’s not too late for Portability).
Portability is a provision in federal estate tax law that allows a surviving spouse to use any unused estate and gift tax exemption after the deceased spouse's death. Portability can be used to protect the surviving spouse from having to pay steep gift or estate taxes upon a spouse's death.
One of the biggest changes spelt out by Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 was the amendment to §2010(c), effective for estates of decedents dying and gifts made after December 31, 2010, to allow portability of a decedent's unused applicable exclusion amount between spouses. Portability simply means that if you were to take a married couple, and one of them passes away, and if the deceased spouse had an estate well under the lifetime threshold, his/her unutilized exemption could be transferred to his surviving spouse. While this a relief, what many surviving spouses fail to understand is that they would need to file a timely estate return for the deceased spouse’s estate even if the estate value was well below the taxable thresholds. Some taxpayers do not realize this, nor do they seek out estate attorney assistance.
The IRS provides some relief to Innocent spouses who were unaware of the mechanics of claiming this relief. This is done by way of a request for a private letter ruling (PLR) from the IRS under §301.9100-3.
We urge clients who were unaware of this, file the request for a PLR as soon as possible. This PLR once received should then be submitted with the late-filed Estate return of the decedent. This important step is necessary for the next generation to use when the surviving parent passes away, to be able to avail the unused exemption of the first parent to pass away along with that of the second parent.
Silicon India Piece
Delighted to be featured in the last issue of Silicon India. It’s great to get some recognition and to see the fruit of our labour in print once in a while, but we never forget that it’s our clients who make all this work interesting, worthwhile and motivating.
Prabha’s office location + appointments
If you’d like to meet with Prabha, here are details about her whereabouts so you can book a time-zone appropriate appointment. Get in touch with her scheduling team at firstname.lastname@example.org and tell us in brief what you would like to discuss. Alternatively, email Prabha directly at email@example.com.
Prabha’s office location:
From early August to end October 2021, Prabha will be in India. She will make shorter trips to the US during this time.