401(K) receipts tax free in India for RNORs

A N Shanbhag, the highly respected investment guru, and his son Sandeep Shanbhag, answer your questions on NRI investment.

A new Rediff India Abroad feature:

I was allotted shares under NRI quota during 1997 through IPO. I am still holding these shares in my name. As per the current income tax law if I sell the shares there will be no tax liability as I hold these shares for more than one year and these are long term capital gain.

If I gift the shares to my parents or brother and subsequently they sell the sales without holding for one year, what is the tax liability to my parents or brother on sale consideration?

For example: I allotted 100 shares of x company at Rs. 10 each during 1996. I was allotted 1:1 bonus in year 2000. So currently I have 200 shares. The current market price is Rs 500 each. I gift all 200 shares to my parents and my parents sell the shares immediately through stock exchange what will be the tax liability to my parents on sale consideration. Please advice.

-- Darshan Shan

For computing long-term capital gains arising out of the subsequent sale by the donee or the legatee, the cost of the property is the cost incurred by the donor when he originally acquired it.

Explanation 'iii' to Sec. 48, defines 'indexed cost of acquisition to mean an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee.

This means that in the case of an inherited or gifted property, the cost of acquisition is the cost to the original holder but the date of acquisition should be taken as the date of the inheritance or the gift. However, the character of long or short-term depends upon the date of acquisition of the original holder. In case this original holder has also acquired the property by way of gift or inheritance then it will be the date of very first holder who purchased or constructed the property.

Your parents will earn long term capital gains for shares sold on the stock exchange recognized in India. The same will be exempt from tax.

I came to the United States on November 22, 2002. I have been staying continuously in the US without going to India for vacation trips. What is the earliest date I can return to India to get RNOR status?

I am currently in the United States. I have a 401(K) account here. I will be closing that account (e.g: balance of $20,000 will be closed.) after I return to India. In that case I will be paying $2,000 (10 percent of $20,000) fine to the US Government. and the remaining amount will be added to my income in the US (tax deduction at source at the rate of 20 percent of $18,000, or $3,600).

So I will be filing the Non Resident US tax return for that year. I may get some money, about $2,000, refunded.

My questions are:

If I return to India before I qualify for RNOR status, do I need to pay tax for the $20,000 or $18,000 or zero dollars (as I already paid tax in the US). If I need to show that as income in India then do I get tax deduction by showing that I paid tax in the US? If so, how much tax deduction I can get?

This question is related to Dividend on Mutual fund. Suppose I have bought a Mutual Funds on May 1, 2005, for Rs 20 each unit. I get dividend of Rs 5 on each unit on May 15 2005.

If I sell my units on July 1, 2005, at a price Rs 18 each unit, I understand that I can marry this loss against the other gains as per the dividend stripping law. But Do I need to show this as a gain? In this case, do I need to show the Rs 3 (Rs 5 Dividend minus Rs 2 loss) as short-term capital gain or zero rupees as capital gain?

If I sell my units on July 1, 2005, at a price Rs 21 each unit, what is my capital gain? Is it Re 1 or Rs 6?

-- Vishwanath

1. Resident but not Ordinarily Resident (RNOR) is a person who satisfies one of the following conditions:

S/he has been a non-resident in India in nine out of the ten previous years preceding that year; or

During the seven previous years preceding that year has been in India for a period of, or periods amounting in all to, 729 days or less.

2. If you are RNOR, the receipt from 401(K) will be tax-free in India. If you are a full fledged Resident the amount received (including the tax paid) will be taxable in India. You may get benefit of DTAA between USA and India. The details of the DTAA are available at www.incometaxindia.gov.in

3. If you sell at Rs 18, the short term capital loss of Rs 2 will be disallowed. If you sell at Rs 21, the profit of Re 1 will be short term Capital Gain.

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The authors may be contacted at wonderlandconsultants@yahoo.com