India: Private Client

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Published March 2018

This country-specific Q&A provides an overview to private client law in the India.

It will cover taxes, succession laws, wills, trusts and their structures.

This Q&A is part of the global guide to Private Client. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/private-client/

  1. Which factors bring an individual within the scope of tax on income and capital gains?

    Income tax including tax on capital gains is levied under the Income Tax Act, 1961 (“IT Act”) which follows the residence-based and source-based rule for the purposes of taxation.

    Residence-based rule:
    A resident individual is taxed on his worldwide income whereas a non-resident individual is taxed on the income, which arises or accrues or deemed to be arising or accruing in India. An individual will be regarded as resident in India if he is in India for 182 days or more in the relevant financial year (April-March) or has been in India for 60 days or more in the relevant financial year and for 365 days or more during the 4 years immediately preceding that relevant financial year.

    The IT Act further categorises residence rule under two heads: ‘resident but not ordinarily resident’ (“RNOR”) and ‘ordinary resident’ (“OR”). In case of an RNOR, Income is taxable in India to the extent it arises or accrues or is deemed to arise or accrue in India. In case of an OR, his worldwide income is taxable in India. An individual is regarded as RNOR, if he has been a non-resident in India in 9 out of the 10 financial years preceding the year, in which he becomes a resident or he has spent less than 729 days in India during the 7 financial years preceding the relevant financial year.

    Source-based rule:
    Any income arising by virtue of a business connection in India, fees for technical services, salaries earned in India, interest pay-outs, dividends, royalty pay-outs, capital gains arising on transfer (including sale, exchange, release, etc.) of a capital asset (tangible or intangible) which is situated or deemed to be situated in India is taxable in India.

  2. What are the taxes and rates of tax to which an individual is subject in respect of income and capital gains and, in relation to those taxes, when does the tax year start and end, and when must tax returns be submitted and tax paid?

    Tax and rates of tax:
    Income of an individual, such as income in the nature of professional fees, arising out of a business, payroll, etc., is taxed at progressive slab rates. However, capital gains are taxed at special rates, which are discussed below.

    For the financial year 2017-18, the slab rates are as follows:

    SLAB

    TAX RATE

    For the first INR 250,000*

    0%

    For the amount between INR 250,001 – INR 500,000**

    10%

    For the amount between INR 500,001 – INR 10,00,000

    20%

    For the amount above INR 10,00,000

    30%

    *: In case, the age of individual is:

    (i) 60 years or more but less than 80 years: the income tax slab is INR 300,000;

    (ii) 80 years or more: the income tax slab is INR 500,000.

    **: The second slab will not be applicable to an individual who is 80 years or more.

    Individuals are also required to pay surcharge provided the incomes exceed a certain threshold. Further, education cess is also levied on the applicable income tax and surcharge. Currently, the rate of education cess is 3% whereas surcharge is levied on an individual’s income at the following rates depending upon the income thresholds:

    Income

    Resident / Non-Resident

    Between INR 5 million and INR 10 million

    10%

    Over 10 million

    15%

    Gains arising to an individual on transfer of capital assets is taxed under the head of ‘capital gains’. Capital gains taxation is dependent upon the period of holding of assets and the type of assets, which are being transferred. A brief overview is as provided hereunder:

    Sr no

    Type of Assets

    Period of Holding

    Category of Capital Asset

    Rate of Capital Gains (See Note 2)

    1

    All assets except shares of Indian listed company, shares of unlisted company and immovable property (being land or building or both)

    36 months or less / More than 36 months

    Short Term Capital Assets / Long Term Capital Assets

    Progressive slab rate / 20%

    2

    Shares of Indian listed company

    12 months or less / More than 12 months

    Short Term Capital Assets / Long Term Capital Assets

    15% / 0% [provided securities transaction tax has been paid upon transfer otherwise the rate of tax will be applicable progressive slab rate / 20% (See Note 1)]

    3

    Shares of an Indian unlisted company and immovable property (being land or building or both)

    24 months or less / More than 24 months

    Short Term Capital Assets / Long Term Capital Assets

    Progressive slab rate / 20% (See Note 1)

    Note 1: In the event, the asset being transferred is share of unlisted company and by a non-resident individual, the rate of capital gains tax would be 10%. As per the Budget Proposals, it is proposed to tax the long-term capital gains at the rate of 10% arising from transfer of shares of an Indian listed company.

    Note 2: The rates are subject to applicable surcharge and cess.

    The tax year in India runs between 1 April and 31 March of the next year. An individual is required to report his income and file the annual tax returns by 30 July following the end of the relevant tax year. If the income threshold of an individual exceeds the prescribed threshold, then he is required to undertake a tax audit and thereby file the tax returns by 30 September following the end of the relevant tax year. In the event a non-resident individual who is an Indian citizen or a person of Indian origin and the only income derived from India by such individual are in the form of specified investment income on which tax has been already withheld, then he need not file a tax return in India. Specified investment income means long term capital gains arising on transfer of shares, debentures, bonds purchased by using foreign currency.

    The IT Act further requires a taxpayer to pay advance tax if the estimated income tax payable by a taxpayer is more than INR 10,000 in a tax year. The advance tax is required to be paid in installments over the course of the relevant tax year.

  3. Are withholding taxes relevant to individuals and, if so, how, in what circumstances and at what rates do they apply?

    Yes. If the income being paid to the individual is in the form of consultancy fee, directors’ fee, non-compete fee, salary, commission, fees for technical services, rent of plant and machinery, interest payments, rent of land or building, royalty payments (provided if such income exceed a certain threshold) then the same would be subject to withholding tax. Further, if the individual is a non-resident, then any kind of remittance will be subject to withholding tax, unless the remittance is not taxable under the IT Act or under the applicable double taxation avoidance agreement with the country of residence of the non-resident individual and India.

    It is pertinent to note that if the individual does not have the Indian tax registration number viz., the Permanent Account Number (“PAN”), then the withholding tax rate will be 20% or the rates specified under the IT Act or the rates in force. A non-resident is exempted from the requirement of obtaining PAN and thereby the consequences of not having one, if he submits details in prescribed form (which includes tax residency certificate, tax registration number of the individual in which he is a resident of, address, etc.)

  4. Is there a wealth tax and, if so, which factors bring an individual within the scope of that tax, at what rate or rates is it charged, and when must tax returns be submitted and tax paid?

    Wealth tax is not levied in India.

  5. Is tax charged on death or on gifts by individuals and, if so, which factors cause the tax to apply, when must a tax return be submitted, and at what rate, by whom and when must the tax be paid?

    Currently, India does not have any taxes, which are charged upon death of an individual. Taxability of gift transactions is currently dealt under the IT Act. Section 56 of the IT Act provides that if any person (including individual) receives any property from any person whatsoever, the value of which exceeds INR 50,000 without any consideration or for inadequate consideration, then the difference between the fair market value of such property and the price paid, if any, will be considered as income in the hands of the recipient and taxed accordingly. However, Section 56 is inapplicable under certain circumstances, some of which are elaborated hereunder:

    (a) any relative (in case of an individual) as defined under the IT Act;

    (b) on the occasion of the marriage of the individual;

    (c) under a Will or by way of inheritance;

    (d) in contemplation of death of the payer;

    (e) any prescribed local authority;

    (f) any prescribed fund or foundation or university or other educational institution or any medical institution;

    (g) any prescribed charitable trust;

    (h) any trust settled by the settlor for the benefit of the individuals who are his relatives.

    For details relating to filing of tax return, please see response to Question No 2.

  6. Are tax reliefs available on gifts (either during the donor’s lifetime or on death) to a spouse, civil partner, or to any other relation, or of particular kinds of assets (eg business or agricultural assets), and how do any such reliefs apply?

    Please refer to response to Question No 5.

  7. Do the tax laws encourage gifts (either during the donor’s lifetime or on death) to a charity, public foundation or similar entity, and how do the relevant tax rules apply?

    Currently, the IT Act allows deduction from the total income of an individual on the donations made to prescribed relief funds and charitable institutions. The deductions range between 50% and 100% of the amount donated.

  8. How is real property situated in the jurisdiction taxed, in particular where it is owned by an individual who has no connection with the jurisdiction other than ownership of property there?

    As noted above, India follows residence-based and source-based rules of taxation. Therefore, going by the source-rule, if the real property is situated in India, then any income arising from the real property (whether in the nature of rental income or capital gains on transfer of the real property,) will be subject to tax in India. In case the transfer of real property is not undertaken at fair value, which means if the consideration is less than Government prescribed stamp duty value, then the stamp duty value of such real property is deemed as the consideration. Accordingly, such stamp duty value will be factored in to determine the capital gains tax implications. Furthermore, there would be implications under Section 56 of the IT Act as well, if the real property is received by any person at a price which is less than the Government prescribed stamp duty value.

    India has signed a number of double taxation avoidance agreements with several countries. In a situation, if an individual is resident of a country with which India has signed a double taxation avoidance agreement, then the provisions of double taxation avoidance agreement would apply to the extent it is more beneficial to the individual for the purposes of taxation of income (arising from real property) in India.

  9. Are taxes other than those described above imposed on individuals and, if so, how do they apply?

    Indirect Tax
    Goods and Services Tax (“GST”) has been recently introduced in India. GST has subsumed most of the earlier indirect taxes such as excise duty, service tax and value added tax. The implications of GST will arise to an individual if his annual turnover exceeds a certain threshold and will be determined by the nature of services or goods supplied.

    Stamp duty
    Stamp duty is payable on any instrument which creates or extinguishes any right, title or interest of a person (including individuals) in a property (whether movable or immovable). The rate of stamp duty is dependent upon the nature of property being dealt with under the instrument.

  10. Is there an advantageous tax regime for individuals who have recently arrived in or are only partially connected with the jurisdiction?

    As explained above, IT Act incorporates the concept of RNOR in determining the residential status of an individual for the purposes of taxation. Thus, if an individual is an RNOR, his income will be taxable in India only if it is earned, accrued, arising or deemed to arise or accrue in India. Any non-resident individual who starts residing in India, he is more likely to qualify as a RNOR for the first tax year in India. In such a situation only the income, which is accrued or arisen or deemed to accrue or arise in India, will be taxable as against his worldwide income (applicable to an OR).

  11. What steps might an individual be advised to consider before establishing residence in (or becoming otherwise connected for tax purposes with) the jurisdiction?

    Offshore assets planning may be undertaken before shifting residence in India. Also, please refer to response at Query No 10.

  12. What are the main rules of succession, and what are the scope and effect of any rules of forced heirship?

    Succession laws in India are dependent upon religion and customs followed by an individual. Succession laws for individuals professing Hinduism, Zoroastrianism, Judaism and Christianity faith are codified; however, succession amongst Muslims is still governed by uncodified Sharia Law. The Indian Succession Act, 1925 governs the succession amongst Zoroastrian, Jews and Christians. Succession matters of Hindus, Sikhs, Buddhist and Jains are enshrined under the Hindu Succession Act, 1956.

    So far as Wills and testamentary dispositions are concerned, the provisions of Indian Succession Act, 1925 are applicable to everyone (except Muslims) regardless of the religion being followed and thereby can bequeath the properties in the manner the testator desires. In case of Muslims, as Sharia Law is applicable, they cannot bequeath more than one third of their properties under a Will. The rest viz., two-third has to devolve upon the heirs in the manner specified under the Sharia law. In the event, a Muslim testator bequeaths more than one-third of his properties under a Will, the bequest would be valid only if the heirs at the time of distribution of properties give their consent to distribute in accordance with the Will.

    One exception to the above discussion is that the Goa Succession, Special Notaries and Inventory Proceeding Act, 2012 (GSSNIP Act) governs succession matters of individuals residing in Goa (a state in India). GSSNIP Act also incorporates the community property rules.

  13. Is there a special regime for matrimonial property or the property of a civil partnership, and how does that regime affect succession?

    India does not have a special regime for matrimonial property. However, community property rules are incorporated in GSSNIP Act, which is applicable to the residents of Goa.

    It is to be noted that if a marriage has been solmenised under the Special Marriage Act, 1954 then regardless of the faith followed by the individuals, the succession matters amongst such individuals is governed by Indian Succession Act, 1925.

  14. What factors cause succession laws to apply on the death of an individual?

    As noted above, succession matters in India are governed by the faith followed by the individual. Another factor that is considered is the domicile of the deceased individual and the type of property he holds at the time of his demise. The laws of India govern succession of an immovable property if the property is situated in India whereas succession of movable property is governed by the law of the country in which the deceased was domiciled at the time of his demise.

  15. How does the jurisdiction deal with conflict between its succession laws and those of another jurisdiction with which the deceased was connected or in which the deceased owned property?

    So long as there is a testamentary document such as the Will, the courts will give credence to that in deciding matters relating to inheritance of properties of a deceased. However, if there is no such document, then the personal laws of succession will be applicable depending upon the domicile of the deceased.

    The Indian legislation attempts to limit the applicability of doctrine of renvoi to the extent possible. For instance, in order to address the conflict of law in matters of succession, Section 5 of the Indian Succession Act provides that if an individual dies intestate then succession of immovable property situated in India, will be governed by the Indian law whereas in the case of movable properties it will be governed by the law of the jurisdiction where the individual was domiciled prior to his demise. However, India does respect principles of private international law, thus to the extent there is a conflict, the courts will apply the doctrine accordingly.

  16. In what circumstances should an individual make a Will, what are the consequences of dying without having made a Will, and what are the formal requirements for making a Will?

    As noted above, religion, domicile and the type of property the deceased holds, govern succession law in India. If an individual dies intestate, then the properties of the deceased will have to be distributed to his heirs in the manner as provided under the succession laws – such as Hindu Succession Act, 1956 or Indian Succession Act, 1925 or the uncodified Sharia Law. Also, if an individual who is not domiciled in India and holds immovable property in India, and if he dies intestate then such immovable property will devolve upon his legal heirs in accordance with applicable succession laws of India. Thus, a Will can act as a tool to plan the inheritance such that upon demise, the property is distributed to an intended beneficiary. Under the Indian law, for a Will to be valid, it should have the following characteristics: (a) it is made out of one’s own free will and without any duress; (b) it is made in writing (except when it is a privileged Will); (c) it is signed by the testator; and (d) attested by 2 witnesses. Upon the demise of the testator, the Will comes into operation and the executor is required to distribute the properties in terms of the Will. In some cases, the Will would be required to be probated by court of appropriate jurisdiction in India before the executor can distribute the properties.

  17. How is the estate of a deceased individual administered and who is responsible for collecting in assets, paying debts, and distributing to beneficiaries?

    The executor mentioned under the Will administers the estate of a deceased individual. In the event, he has died intestate or if the executor who has been mentioned in the Will is unable to assume the role of an executor for any reason whatsoever, then, the court appoints an administrator by granting a letter of administration. The executor or the administrator thereafter is responsible for collecting assets, paying debts and distributing the assets of the deceased to the beneficiaries.

  18. Do the laws allow individuals to create trusts, private foundations, family companies, family partnerships or similar structures to hold, administer and regulate succession to private family wealth and, if so, which structures are most commonly or advantageously used?

    Indian law allows setting up of private trusts, companies and partnerships. These entities can be and have been used for the purposes of structuring family wealth and succession planning. Traditionally, Indian families preferred holding their assets through a company. This is because companies under the Indian law are regarded as separate legal entity, which was comforting to the families as the legal title of the assets vests in an entity, which is ultimately owned and controlled by them. As the awareness quotient upped, partnership firms and trusts were extensively used for the purposes of succession planning. General partnership firms and trusts are not regarded as separate legal entities. The ownership of assets is regarded to be in the hands of the partners (jointly) and the trustees. In 2013, Indian legislature legislated the concept of limited liability partnership (“LLPs”) and hence this structure is also being used (more so over companies and general partnership firms) for the purposes of holding family wealth.

    It is pertinent to note that the adoption of a structure is more often than not driven by costs as well – i.e. administrative and tax costs.

  19. How is any such structure constituted, what are the main rules that govern it, is there any requirement for registration with or disclosure to any authority or regulator, and what information about the structure is available to the public?

    a. Company
    Companies can be formed as private limited or public limited companies. Unlike the public limited companies, private limited companies are saddled with fewer compliances and disclosure requirements. A private limited company must restrict the number of its members and the transfer of its shares and cannot invite the public to subscribe to shares or make deposits. Companies incorporated under the Companies Act, 2013 are compulsorily required to be registered with the Registrar of Companies. Largely, all the information regarding the companies for instance, the charter documents, the shareholders, the resolutions, the composition of board etc., can be accessed at the Registrar of Companies.
    The income of the company is taxable at the flat corporate rate of 30% (plus applicable surcharge and education cess) (however, under certain circumstances the rate of tax is lower). Indian companies are required to pay dividend distribution tax (“DDT”) on the dividends they declare to its shareholders. The dividends so received by the shareholders are exempt unless on an aggregate basis the dividends received by the shareholder do not exceed INR 1 million. If the dividend income exceeds INR 1 million, then such excess dividend is taxed at a flat rate of 10% in the hands of the shareholders.

    b. Trust
    Private trusts in India have been used extensively for a long time for the purposes of asset protection, estate and succession planning. The Indian Trusts Act, 1882 follows the common law provisions. The legislation contains detailed provisions on how the trust should be managed by the trustees in terms of their duties and responsibilities, rights of the beneficiaries, circumstances under which the term of the trust comes to an end and so on and so forth. Although a trust is not required to be in writing, however, if it were proposed that the trust would hold a real property the same would have to be settled under a trust deed and thereby registered with the appropriate authority.

    From a tax point of view, trust is considered as a pass-through entity. The income of the trust is taxed in the hands of the trustee for and on behalf of the beneficiaries. If the trust is a discretionary trust, then the income of the trust is taxable at the maximum rate applicable to an individual taxpayer (which currently stands at 30%). If the trust is a determinate trust, the income of such a trust is taxable vis-à-vis each beneficiary of the trust at the rate applicable to such a beneficiary. In the event the trust is a revocable one, then the income of such a trust is taxable in the hands of the settlor of the trust.

    c. Partnership Firm
    Indian Partnership Act, 1932, governs partnerships. The legislation recognises oral as well as written partnerships. Although there is no requirement to register a partnership firm with the Registrar of Firms, registration does give an edge in terms of enabling the partners to sue the firm and/or the other partners to enforce any right or interest.

    Legally, partnership firm is a pass-through entity however from a tax perspective, it is considered as a separate legal entity wherein its income is taxed at a flat rate of 30%. Any distribution of such post-tax profits is exempt in the hands of the partners.

    d. LLP
    As noted above, LLP is a recently introduced concept and governed by the Limited Liability Partnership Act, 2008. LLP is an entity, which has the features of a company and partnership firm. It is required to be registered with Ministry of Corporate Affairs. Unlike a partnership firm, LLP is a separate legal entity and the liability of a partner is also limited. From a tax perspective, LLP scores over a company in terms of distribution of profits by the LLP as an LLP is not required to pay DDT at the time of distribution of profits to its partners.

  20. How are such structures and their settlors, founders, trustees, directors and beneficiaries treated for tax purposes?

    Please refer to the response to Question No 19.

  21. Are foreign trusts, private foundations, etc recognised?

    Yes. Depending upon the construct of the structure (trusts and foundations) and the manner in which the property is held by the structure, the Indian legal and tax implications follow. If the structure is a discretionary trust, the property is regarded to be owned by the trustee unless distributed to the beneficiaries. If the structure is a foundation, where the Indian-resident beneficiary holds specified share in the assets of the foundation, then to the extent of such proportion, the asset may be considered to be owned by the beneficiary. In such a scenario, the income of the foundation, to the extent the beneficiary has an interest, may be taxable in India.

  22. How are such foreign structures and their settlors, founders, trustees, directors and beneficiaries treated for tax purposes?

    As noted above, trusts are considered to be pass-through entities for the purposes of tax. If the trustee of the foreign trust is resident in India, then as per the residence-based rule of the IT Act, the foreign trust may be regarded as being controlled and managed from India and be regarded as resident in India. Consequently, the income of such a foreign trust will be taxable in India.

    Further, if a foreign trust is a discretionary trust and has Indian resident beneficiary, the Indian resident beneficiary will not be taxed unless a distribution is received from the foreign trust. However, if the beneficiary’s interest in the foreign trust is determinate, it will have to not only pay taxes on such income in India but also report his determinate interest in its annual tax returns in India regardless of receipt of any distribution in a particular tax year.

    The IT Act requires an Indian tax resident individual to appropriately disclose in his annual tax returns if he is a trustee or settlor of a foreign trust or has signing authority in any account located outside India or is a beneficiary of any asset located outside India.

  23. To what extent can trusts, private foundations, etc be used to shelter assets from the creditors of a settlor or beneficiary of the structure?

    The structure of an entity to shelter assets from creditors depends upon the timing of the settlement of trust and the type of the trust that is settled. For instance, as per the bankruptcy law of India, if assets are transferred by an individual for inadequate consideration and if such an individual is adjudged insolvent within 2 years of such transfer, then such transfer will be considered void/voidable. Furthermore, if the trust is a determinate trust and if an insolvency proceeding is initiated against a beneficiary of a determinate trust, then unfortunately the assets of the trust may not be insulated from insolvency proceedings initiated against the beneficiary. Thus, proper planning and structuring is required to achieve bankruptcy remoteness.

  24. What provision can be made to hold and manage assets for minor children and grandchildren?

    The mechanism of settling a trust is currently the best way to hold and manage assets for minor children and grandchildren. So long as the basic provisions as mandated under the Indian Trusts Act, 1882 are followed and a trust is not settled for an illegal purpose, Indian law gives a great deal of flexibility in structuring the distribution of assets or income held in a trust, the type of persons that can be made beneficiaries, the functions of the trustee, the life of the trust etc.

  25. Are individuals advised to create documents or take other steps in view of their possible mental incapacity and, if so, what are the main features of the advisable arrangements?

    Unlike in England, India does not have the concept of enduring power of attorney – an authorisation given to an individual to act on behalf of the grantor, if the grantor is incapacitated. Per the Indian law, if the grantor is mentally incapacitated, then the power of the attorney granted to any person stands revoked. Thus, in such a scenario, the only avenue left is to undertake matters of succession planning as early on as possible and make it flexible enough to adapt to changing circumstances.

  26. What forms of charitable trust, charitable company, or philanthropic foundation are commonly established by individuals, and how is this done?

    For the purposes of undertaking charitable activities, trust and company are commonly used structures in India.

    Registration and applicability of law depends upon the state of India, in which the charitable trust is being set up. For instance, if the charitable trust is proposed to be set up in Maharashtra, then the charitable trusts will have to satisfy the provisions of Bombay Public Trusts Act, 1950.

    If individuals seek to further their charitable objects through a company, then such a company will have to be set up under Section 8 of the Companies Act, 2013. Companies incorporated under Section 8 have special set of rules that need to be complied with, such as the profits will only be applied for charitable purposes, there will be no distribution of dividends to its shareholders, change in charter documents of the company can be done only with the prior approval of the Central Government, etc.

    Furthermore, the charitable entities are exempt from tax on their income provided they are registered with the Charity Commissioner and continue to fulfill certain conditions prescribed under the IT Act.

  27. What important legislative changes do you anticipate so far as they affect your advice to private clients?

    The next big change that Indian legal fraternity is foreseeing is the (re)-introduction of Estate Duty law in India. The ball game will be completely different in terms of succession planning once the Estate Duty law is in picture, albeit, when the law will be legislated is still unclear.