INDIA Law and Practice Contributed by: Rishabh Shroff, Kunal Savani and Chirag Shah, Cyril Amarchand Mangaldas
following individuals would qualify as relatives for the purposes of the ITA: • in the case of an individual: (a) spouse; (b) brother or sister; (c) brother or sister of the spouse; (d) brother or sister of either of the parents; (e) any lineal ascendant (maternal as well as pa - ternal) or descendant; (f) any lineal ascendant (maternal as well as pater - nal) or descendant of the spouse; and (g) spouse of the persons mentioned to in (b) to (f); and • in the case of an HUF, any member thereof. 1.3 Income Tax Planning There are no tax planning tools available for stepping up of capital assets to their fair market value. Under the provisions of the ITA, a transfer of a capital asset pursuant to inheritance or Will is exempt from capital gains tax. Hence any capital asset received pursuant to inheritance or Will shall be tax exempt. Further, the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired the said asset. For the purpose of computing the period of holding, the period shall be calculated from the date of acquisition by the previous owner from whom such property is received. As discussed in 1.1 Tax Regimes , non-residents pay tax only on India-sourced income, hence they may set up trusts or alternative investment funds (AIFs) or other tax planning vehicles depending on their requirements in order to defer their income tax liabili - ties. However, any such tax planning vehicle would have to be analysed separately on facts, to determine if they constitute a place of effective management in India or are subject to general anti-avoidance rules (GAAR). 1.4 Pre-Immigration and Exit Planning The Indian taxation framework provides a transitional window before worldwide income becomes tax - able. As discussed in 1.1 Tax Regimes , if a taxpayer qualifies as a RNOR, it is taxed only on Indian-source income and on such foreign-source income as is con -
nected with a business controlled in India or a profes - sion set up in India, rather than on global income. Following the expiry of the RNOR period, the taxpayer would transition to resident status, resulting in their worldwide income becoming taxable in India. Similarly, as discussed in 1.1 Tax Regimes , specific relaxations have been prescribed for Indian citizens and PIOs visiting India, as well as for Indian citizens leaving India for employment purposes, which may defer the onset of full residential status. These provi - sions can be strategically utilised to optimise the tim - ing of residency and associated tax exposure. 1.5 Taxation of Real Estate Owned by Non- Residents and Non-Citizens Regarding real estate assets, the ITA seeks to tax (i) the annual value of the real estate assets, determined in a prescribed manner, under the heading of “income from house property”; and (ii) gains arising from dis - posal of such assets, under the heading of “profits and gains from business or profession” or “capital gains”, depending on whether the assets are held as The annual value of the property, determined in the prescribed manner, is taxed in the hands of the indi - vidual taxpayer at the applicable slab rates. Typically, it is not the rent recovered from a property (unless that is higher) which is subject to tax under this kind of income, but it is the income yielding capacity of the property which is subject to tax (ie, the annual value of the property), subject to certain conditions. capital assets or stock-in trade. Income From House Property For the purpose of computing such income, self- occupied property and property utilised for the pur - poses of carrying on the business or profession of the owner, taxable in India, are excluded. Gains From Disposal of Real Estate Assets Gains arising on sale of property held as capital assets, would be subject to capital gains tax in India. Capital gains tax implications can be summed up as follows. • If the asset (immovable property) has a short-term holding period (ie, two years or less), then the
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