1.1 To what extent is domicile or habitual residence relevant in determining liability to taxation in your jurisdiction?
Indian taxation is attracted based on residence and source of income and the (Indian) Income Tax Act, 1961 (ITA) provides for specific source rules of taxation. Factors such as the taxpayer’s domicile status or habitual residence do not determine their tax liability in India unless such factors are considered to decide the fiscal residence of the taxpayer in accordance with the tie-breaker clause of a Double Taxation Avoidance Agreement (DTAA) that India has entered into.
The concept of domicile is recognised in India to a limited extent for determining succession of property in a few instances such as the succession of moveable property, which depends on the laws of the state where the deceased was domiciled as per the Indian Succession Act, 1925 (ISA) (applicable to persons other than Hindu, Muslim, Buddhist, Sikh or Jain). The said Act specifies rules (similar to English law) on ascertaining and establishing domicile.
1.2 If domicile or habitual residence is relevant, how is it defined for taxation purposes?
Given its limited relevance, as explained above, the ITA does not specifically define domicile or habitual residence.
1.3 To what extent is residence relevant in determining liability to taxation in your jurisdiction?
Under the ITA, residence or physical presence is a connecting factor to determine tax liability. A person who is ordinarily resident in India (refer to question 1.4) is taxed on worldwide income, while a non-resident is taxed on income which is sourced in India i.e., income which accrues, arises or is deemed to accrue or arise in India or is received in India.
1.4 If residence is relevant, how is it defined for taxation purposes?
Residence for individuals can be broadly categorised as:
- An individual who is physically present in India for a period of 182 days in a financial year (commencing on 1 April through 31 March), or who has spent 365 days in four years preceding the financial year, and 60 days or more in the financial year, is regarded as a resident. If such individual has not been a non-resident in nine out of the previous 10 years, or has been physically present in India for more than 729 days in the immediately preceding seven years, then she/he is ordinarily resident of India (ROR). An ROR is taxed on their global income.
- An individual is considered to be a non-resident (NR) if she/he fails the tests of ROR. An NR is only required to pay tax on income sourced in India.
- There is a further transition status for individuals (RNOR) (refer to question 3.2).
1.5 To what extent is nationality relevant in determining liability to taxation in your jurisdiction?
Nationality per se is not a factor in determining the Indian tax liability of a person. However, the ITA provides certain relaxations in case of an Indian citizen who leaves India for the purpose of employment outside India. In case of such a person, the 60-day time limit (refer to question 1.4) is increased to 182 days. This increased threshold is also applicable in case of an Indian citizen or a person of Indian origin (PIO) who has been outside India, and comes to visit India. The increased threshold is to encourage Indian investments by such persons and enable them to look after such Indian investments, etc.
Nationality also assumes relevance when invoking non-discrimination clauses in DTAAs which provide for equal treatment of nationals of the two contracting states.
1.6 If nationality is relevant, how is it defined for taxation purposes?
Nationality is relevant in limited instances. Definitions of the concept include definition of a Non–Resident Indian (NRI) who is an Indian citizen or PIO and is not a tax resident of India. Citizenship is also defined in the Citizenship Act, 1955 (as amended) (Citizenship Act). The ITA deems a PIO as a person who was either born in undivided India, or whose parents or grandparents were born in undivided India.
1.7 What other connecting factors (if any) are relevant in determining a person’s liability to tax in your jurisdiction?
In addition to the residency rules (refer to question 1.4), there are fairly rigorous source rules and withholding tax obligation rules which determine the liability of a person to pay tax or deduct and deposit tax in India. These may be enumerated as follows:
- Gains arising from a foreign asset which derive ‘substantial value’ from an Indian asset trigger capital gains tax in India.
- Receipt of gift of shares of an Indian company would attract a tax liability on the value of the shares to the recipient, unless expressly exempt.
- Making certain types of payment to a resident attracts withholding taxes even when the payer is non-resident.
- A non-resident making payment to another non-resident would be liable to withhold Indian tax if such payment is subject to tax in India.
2.1 What gift or estate taxes apply that are relevant to persons becoming established in your jurisdiction?
Currently, India does not impose estate or gift taxes that are relevant to persons becoming established (resident) in India from a tax perspective (refer to question 3.1). However, the ITA provides that ‘sums’ received for inadequate consideration are taxed in the hands of the recipient as ‘income from other sources’ at the progressive slab rates applicable (highest effective rate being 35.5%, inclusive of surcharge and cess). Certain exemptions have been provided under ITA (for example, receipt from relatives, on the occasion of marriage, inheritance, settling a private trust for the benefit of ‘relatives’ etc.).
2.2 How and to what extent are persons who become established in your jurisdiction liable to income and capital gains tax?
The ITA provides the criteria for tax residency, which in turn impacts the income tax liability of a person (refer to question 1.4). Resident individuals are taxed on a progressive slab basis as under:
Income does not exceed INR 250,000
Income exceeds INR 250,000 but does not exceed INR 500,000
5% of the amount by which the total exceeds INR 250,000
Income exceeds INR 500,000 but does not exceed INR 1,000,000
INR 12,500 plus 20% of the amount by which the total exceeds INR 500,000
Income exceeds INR 1,000,000
INR 1,12,500 plus 30% of the amount by which the total exceeds INR 1,000,000
An additional surcharge at the rate of 10% is applicable to individuals whose total income exceeds INR 5 million but does not exceed INR 10 million. A surcharge at the rate of 15% is applicable to individuals whose total income exceeds INR 10 million. An education cess of 3% of the aggregate of income-tax and surcharge is also applicable.
Gains arising from the transfer of capital assets are taxed at concessional rates. The rate of tax depends on the nature of the asset, period of holding and status of the transferor, as indicated below.
Shares listed on a recognised Indian stock exchange (if sale takes place on the exchange and is subject to Securities Transaction Tax (STT))*
Listed shares sold off the stock exchange and not subject to STT
10% (without availing indexation benefit) / 20%
Unlisted shares of a public or private limited company
*A recent change in law requires that the STT should be paid both, at the time of acquisition as well as the sale of listed shares, except in certain specified cases (for example, acquisition by way of gift, inheritance, approval by the Supreme Court or High Court, acquisition by an NR, etc.) where this requirement is relaxed.
The above rates are exclusive of applicable surcharge and cess. Listed equity shares held for 12 months or less are short-term assets, and those held for more than 12 months are long-term assets. Unlisted shares, on the other hand, are short-term assets if they are held for 24 months or less, and long-term if they are held for more than 24 months. The period of holding for immovable assets to be regarded as long-term capital assets is now to 24 months, while the period of holding in case of all other assets continues to be 36 months.
In case of an NR, the ITA provides for certain situations where the NR is deemed to be taxable in India either because he becomes deemed resident in India, or where income is deemed to accrue or arise in India:
- Salary received for services rendered in India.
- Income from transfer of shares held in an Indian company, and from shares or interest in a foreign company which derives substantial value from an Indian asset.
- Receipt of gift of shares of an Indian company.
- Receipt of an Indian asset (other than cash) for nil consideration or for a consideration less than the fair market value results in income arising in India to the extent of the delta.
- Income from a profession exercised from a place in India.
- A person – partnership, body of individuals or a trust – would be deemed to be resident in India if any of its management or control are in India. A company would be resident in India if its place of effective management is in India or it is incorporated in India.
2.3 What other direct taxes (if any) apply to persons who become established in your jurisdiction?
Currently income tax is the only direct tax payable in India since wealth tax, estate duty and gift tax have been abolished. It is important to consider India’s stringent exchange control regulations viz., Foreign Exchange Management Act, 1999 (FEMA) and regulations thereunder) implications – an important, non-tax consideration while structuring personal assets, migrating from or to India, etc. FEMA and the regulations enacted thereunder govern the inflow and outflow of exchange by governing the nature of transactions that FEMA residents may enter into with FEMA non-residents so far as Indian or foreign property is concerned and vice versa.
2.4 What indirect taxes (sales taxes/VAT and customs & excise duties) apply to persons becoming established in your jurisdiction?
The Goods and Services Tax (GST) has been introduced in India with effect from 1 July 2017. The GST has replaced the erstwhile multi-layered indirect tax system in India. GST has subsumed most of the taxes on goods and services such as service tax, excise duty, VAT, Central Sales Tax, entry tax and entertainment tax (unless levied by local bodies). Presently, certain products such as crude petroleum, high speed diesel, petrol, natural gas, aviation turbine fuel, alcoholic beverages, tobacco and entertainment taxes levied by local bodies are outside the GST ambit.
Basic customs duty on import of goods, stamp duty, electricity duty and cess on few products also remains outside the scope of GST.
Being a federal country, both Centre and State Governments have sovereign powers to levy tax under the Indian Constitution. Hence the GST structure in India comprises of Central GST (CGST), State GST (SGST), Union Territory GST (UTGST) and Integrated GST (IGST). CGST and SGST/UTGST is imposed on intra-state supplies and IGST is imposed on inter-state supplies. Import is treated as inter-state supply of goods/ services and subject to IGST. The GST law ensures minimisation of cascading, smooth, hassle free movement of goods between states and consistency of legal provisions/ procedures amongst different states.
GST in India has multiple rate structure, i.e. 0%, 5%, 12%, 18% and 24% depending upon the nature of goods or services being supplied. Further, the Indian Government is empowered to impose an additional cess on certain luxury and sin goods. GST law provides a scheme of classification for all goods and services. Classification of goods are based on the Harmonized System of Nomenclature (HSN) issued by the World Customs Organization under the aegis of the World Trade Organization.
2.5 Are there any anti-avoidance taxation provisions that apply to the offshore arrangements of persons who have become established in your jurisdiction?
The ITA provides for specific anti-avoidance measures. For instance:
- Indirect transfer of Indian assets: Unless expressly exempt, income arising from the transfer of shares or interest in a foreign company/entity is subject to Indian capital gains tax if the foreign target derives ‘substantial value’ from the Indian assets, i.e., if the foreign target derives 50% or more of its value from Indian assets and if the value of the Indian assets exceeds INR 100 million.
- Transfer pricing: The ITA requires any ‘international transaction’ between associated entities to be entered at an arm’s length price, to be determined as per the specified methods in the ITA. Additionally, relevant documentation is required to be maintained, along with filing the applicable forms.
- Revocable transfers to trusts: Even if characterised by the taxpayers as an irrevocable trust, if the settlor of a private trust has the right to re-transfer to self or re-assume control over the trust assets and income, then the income from such assets is included in the settlor’s total income. The transfer is not regarded to have taken place.
- Minimum alternate tax (MAT) and buy-back tax (BBT): In order to protect the tax base, certain provisions have been introduced as measures to curb avoidance. For instance, MAT (at the rate of 18.5%, exclusive of applicable surcharge and cess) is applicable to companies (including foreign companies that have a place of business or permanent establishment (PE) in India, as the case may be) whose income tax payable is less than 18.5% of its book profits. Similarly, Indian private companies are subject to 20% tax on buy-back of shares on the delta between the amount paid to the shareholders and the amount that was received by the company on the shares. This is to avoid using buy-back of shares as a mechanism to distribute dividend.
- Measures to curb income shifting: Where an asset is transferred in circumstances and under an arrangement that income arises therefrom, though accruing to an NR, is enjoyed by a resident, the said income would be chargeable to income-tax in India. In the event a person sells and then buys back securities with the effect that the interest receivable on such securities is received by a person other than the owner, such interest would be considered as income in the hands of the owner and not the other person.
- Notification of non-cooperative jurisdictions: The Central Government also reserves the power to notify a jurisdiction as a non-cooperative jurisdiction if it fails to comply with the exchange of information requirements, thereby causing any payments made to a resident of such country liable to higher withholding taxes and compliances including transfer pricing regulations. Currently there is no jurisdiction falling in this category. Cyprus, which was notified a few years ago has been de-notified.
2.6 Is there any general anti-avoidance or anti-abuse rule to counteract tax advantages?
India has implemented the general anti-avoidance rules (GAAR) with effect from 1 April 2017. GAAR empowers the tax authorities to determine tax implications based on the ‘substance’ of the transactions. For GAAR to be triggered, the transaction/structure/ arrangement should be an ‘impermissible avoidance arrangement’, which means that the main purpose of entering into an ‘arrangement’ should be to obtain a ‘tax benefit’, and such arrangement must satisfy any of the following conditions: (i) create rights or obligations which are not ordinarily created between unrelated parties; (ii) results, directly or indirectly, in the misuse or abuse of the provisions of the ITA; (iii) lacks or deems to lack commercial substance in whole or in part; or (iv) is entered into or carried out for mala fide purposes. Such an arrangement may result in the tax authorities denying DTAA benefits, disregarding the step or a party to the transaction, reallocating or recharacterising income among the parties or looking through the transaction between the parties.
However, transactions entered into prior to 1 April 2017 are grandfathered, i.e., GAAR will not apply to income earned/received by any person from transfer of investments made before 1st April 2017, irrespective of the date on which income from such transactions arises. The Central Board of Direct Taxes (CBDT) has also released a set of clarifications as to the application of GAAR in certain situations.
2.7 Are there any arrangements in place in your jurisdiction for the disclosure of aggressive tax planning schemes?
There are no reporting requirements of aggressive tax planning schemes. While Indian residents are required to disclose details of any and all foreign/offshore assets held by them in ‘Schedule FA’ of their income tax return, irrespective of whether any income has been earned on these foreign assets during the financial year, disclosure under Schedule FA is not related to tax planning, per se. Further, if a foreign asset has been held by an Indian resident at any time during the financial year, it needs to be disclosed under Schedule FA, regardless of whether the Indian resident continues to hold the foreign asset as at the end of the financial year or not. An Indian resident is also required to notify if he/she settles an offshore trust and transfers any assets to it, whether held in India or outside India and whether the beneficiaries are resident or NR.
It is also important to note that if questioned by the tax authorities, the Indian resident must also be able to explain and justify the source of the foreign asset(s) to the authorities.
3.1 In your jurisdiction, what pre-entry estate and gift tax planning can be undertaken?
India does not currently have specific laws governing the taxation of estates and gifts.
- Estate Duty Act, 1953 (Estate Act) aimed to level the disparity and concentration of wealth in Indian society, was abolished in 1985;
- Gift Tax Act, 1958 introduced to curb practices of tax evasion by gifting assets, met with a similar fate (abolished in 1998); and
- Wealth Tax Act, 1957 which imposed a tax on an individual’s net worth, was repealed in 2015.
Therefore, unlike other jurisdictions, from an Indian tax perspective, there are no pre-entry estate or gift tax planning measures that can be undertaken.
However, a key pre-entry planning strategy pertains to navigating FEMA by appropriately structuring the foreign assets and funds acquired while being a non-resident, as per the FEMA residency rules, to remain outside the purview of FEMA restrictions even after the individual becomes a FEMA resident after entry into India. Residence under FEMA is based on the physical presence test (i.e. presence of 182 days in India) as well as intention to stay or remain in India for carrying on or setting up business or taking up employment in India for an indefinite period, and in circumstances which indicate that the person intends to remain in India for an uncertain period.
3.2 In your jurisdiction, what pre-entry income and capital gains tax planning can be undertaken?
India taxes on the basis of tax residency, which in the case of individuals is related to the physical presence of the individual (and not nationality or citizenship). Residents are taxed on their worldwide income, with the only exception being the transition period provided to persons who have been non-resident for tax purposes in India for a long period of time. If a person has been a non-resident in nine out of previous 10 tax years, or has not been present in India for more than 729 days in the immediately preceding seven years, then even though she/he is resident in India (refer to question 1.4) in the relevant fiscal year, only the Indian source income is taxable in India. This residence status is termed ‘resident but not ordinarily resident’ (RNOR).
In terms of tax planning through offshore trust structures, it is preferable for an Indian (ordinary) resident (refer to question 1.4) to be named as a discretionary beneficiary (not having a specific or determinate share in the trust). This ensures that there is an Indian tax incidence only when a distribution is made. Further, from a tax perspective, Indian residents should not be the key decision-makers of offshore companies or trusts (refer to question 5.1).
3.3 In your jurisdiction, can pre-entry planning be undertaken for any other taxes?
Yes, pre-entry tax planning can be undertaken to mitigate indirect tax implications considering that taxability under the GST regime is based on nature of activity, location of supplier of goods/services and the location of recipient of the goods/services.
The GST law provides various exemptions (such as abatement), based on the nature and purpose of goods/services supplied. A concessional rate has also been provided in respect of supplies in specific states/regions.
Under the GST, exports and supplies to Special Economic Zone (SEZ) are treated as ‘zero-rated’ and such supplies can be made without payment of tax after furnishing a bond or a letter of undertaking in prescribed manner. In case the said requirements are not met, the supplier would be required to pay tax and claim refund of GST so paid. The GST law also provides for refund of input taxes paid on such zero-rate supplies.
Under the GST regime, the Indian Government has done away with the area based exemptions/tax deferment schemes which were available under the erstwhile regime. It is expected that the Indian Government will work out a mechanism to compensate the existing assesses who had opted for area based exemption/tax deferment schemes in the erstwhile regime by way of granting refund/rebate of taxes.
Thus, the business and its conduct and implementation should be carefully planned prior to entry into India to ensure that the benefits as set out above can be availed, where available.
4.1 What liabilities are there to tax on the acquisition, holding or disposal of, or receipt of income from investments in your jurisdiction?
Acquisition: There is no taxation on an NR while making an investment in India. However, if the NR is acquiring the asset from another NR, then she/he must withhold the applicable Indian tax while making the payment to the NR, else run the risk of being treated as a tax defaulter.
Holding: There being no wealth tax, no tax is levied on holding Indian investments. Dividend is taxable only on the company distributing the dividends at an effective rate of 20.36% on a grossed- up basis (Dividend Distribution Tax or DDT), and not taxed on the recipient thereafter. An additional surcharge of 10% is levied on all resident taxpayers except domestic companies and certain specified funds and institutions, on the dividend received in excess of INR 1 million. In case of debt investment, interest receivable by the NR would be subject to withholding tax under the ITA or the applicable DTAA, depending on what is more beneficial to the NR and whether the NR is eligible to the benefits of the DTAA.
Disposal: The ITA provides for five, mutually exclusive heads of income. Subject to income characterisation rules specified in the ITA, investments are typically treated as capital assets and are subject to capital gains tax in India at tax rates based on the nature of the asset and period of its holding. In case of NRs, applicable DTAA provisions may reduce the tax incidence in case of certain assets, and direct or indirect transfer thereof.
4.2 What taxes are there on the importation of assets into your jurisdiction, including excise taxes?
Customs duty is levied by the Central Government on the import or export of goods. The rate of customs duty is set out in the Customs Tariff Act, 1975 and is aligned with the 8-digit HSN as adopted by the World Customs Organisation. India has also adopted the internationally accepted rules for valuation of import or export of goods.
Customs duty comprises of basic customs duty, IGST (in lieu of the GST, if supply was within India), cess and other safeguards or anti-dumping duties, if applicable. The IGST component in the Customs duty has replaced erstwhile countervailing duty (in lieu of the duty of excise payable on such goods, if manufactured in India) and special additional duty (in lieu of VAT on such goods, if sold in India).
The Indian Government issues various general and thematic (product/industry/end use) exemption notifications which provide concessional rates of customs duty. Various other free trade agreements are also implemented for notified products. Additionally, pricing guidelines, prior RBI approvals and restrictions on outward remittances, where applicable, must be considered from a FEMA perspective when engaging with NRs for the import of assets into India.
4.3 Are there any particular tax issues in relation to the purchase of residential properties?
When purchasing residential property from an NR, the individual is required to withhold appropriate capital gains taxes, and deposit the same with the Indian treasury. In case of purchase of residential (or immovable) property from any other person, there is a 1% withholding tax. It is important to consider roll-over benefits and capital gains tax exemptions specified in the ITA when re-investing in residential property (for example, if gains arising from transfer of a long-term capital asset are reinvested in a residential property within the prescribed timelines). Importantly, the consideration paid for land or building purchased must be commensurate with the value adopted for the payment of stamp duties.
From a regulatory perspective, FEMA permits PIOs and NRIs to acquire such residential property, other than agricultural property and farm or plantation for personal use, unless inherited from a FEMA resident. NRIs and PIOs cannot engage in real estate business.
5.1 What is the test for a corporation to be taxable in your jurisdiction?
Under the ITA, a company is liable to pay tax in India if it (i) is a tax resident of India; or (ii) has income sourced in India (refer to question 1.7).
Residency: A company is resident in India if it is incorporated or registered in India or its place of effective management (POEM) is situated in India. The POEM test replaced the erstwhile ‘control and management’ test, and is defined to mean “a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are in substance made”. It is applicable to foreign companies with a turnover/gross receipts of more than INR 500 million. The CBDT has issued final guidelines for the application of the POEM test which rely on a combination of objective and subjective criteria. These criteria are more or less stringent based on whether the business of the offshore company is active or passive. The guidelines also specify other factors to determine POEM (such as ascertaining the person or persons who actually make the key management and commercial decision, place of decision making, delegation of powers of directors, etc.).
5.2 What are the main tax liabilities payable by a corporation which is subject to tax in your jurisdiction?
In addition to DDT (refer to question 4.1), MAT (refer to question 2.5) and BBT (refer to question 2.5) the main tax liabilities of a company arise in the following circumstances:
- On income – from business (which include royalties, licence fees, interest, etc., depending on the nature of the business), capital gains, income from house property and income from other sources. Relevant provisions of applicable DTAAs may be relied on in case of NR companies, where beneficial.
- Various withholding taxes when making payments to a non-resident when it is taxable in India, as well as all payments made to a resident (such as payments in the nature of payroll, professional fees, interest, royalty, etc.).
- The applicable tax rates and implications differ in case of resident and non-resident companies.
5.3 How are branches of foreign corporations taxed in your jurisdiction?
In addition to MAT, a branch of a foreign company would be subject to tax at the rate of 40% (exclusive of applicable surcharge and cess) on income arising in or attributable to its activities in India. There is no separate branch profits distribution tax. A branch of a foreign company is required to comply with all the Indian tax provisions with regard to withholding taxes when making payments, whether to a resident or non-resident (refer to question 5.1). The deductibility of general head office expenses of Indian branches of foreign companies is restricted under the ITA and most treaties do not provide for any relaxation in this regard.
6.1 Has your jurisdiction entered into income tax and capital gains tax treaties and, if so, what is their impact?
The ITA enables India to enter into treaties to avoid double taxation, promote mutual economic relations, and exchange information. India has entered into approximately 93 DTAAs, 19 Tax Information Exchange Agreements (TIEA), 6 Limited Multilateral Agreements, and has approximately 75 Bilateral Investment Treaties in force. Capital gains-related provisions are part of the DTAAs. India has also signed and is yet to ratify, the Multilateral Instrument (MLI) to make changes to its existing network of bilateral tax treaties, to align them with the BEPS project (refer to question 11.1) in order to combat artificial shifting of profits to low tax jurisdictions, and to ensure that profits are taxed in the country where the economic activities are carried out and the value is created.
In order for a NR to claim DTAA benefits, she/he should comply with the eligibility criteria specified in the ITA and DTAA in this regard. The record of India granting DTAA benefits to eligible taxpayers is reasonably good and the courts have generally upheld the beneficial tax treatment accorded by treaties even where a plea is made that erodes India’s tax base and tax revenue, provided it is not fraudulent and the legalities are complied with.
The recent amendments to the DTAAs with Mauritius, Singapore and Cyprus have revised the beneficial capital gains tax treatment in relation to investments in shares of Indian companies (not affecting other instruments like debentures etc.) to allow India to tax such gains where the share acquisition has been made on or after 1 April 2017. There is a concessional rate for the transition period for acquisition and sale of shares between 1 April 2017 and 31 March 2019 provided the limitation of benefits criteria are satisfied.
There are no separate capital gains tax treaties entered into by India. This aspect is covered in the comprehensive tax treaties.
6.2 Do the income tax and capital gains tax treaties generally follow the OECD or another model?
Indian tax treaties follow a combination of the OECD and the UN Model. Indian courts have recognised and relied on OECD and UN model commentaries while interpreting DTAA provisions. Importantly, India has been granted the status of an observer in OECD since it is not a member country. Recent DTAAs concluded or amended demonstrate a trend to protect India’s source-based taxation. The inclusion of service PE clauses (typical of UN model DTAAs) is a case in point.
6.3 Has your jurisdiction entered into estate and gift tax treaties and, if so, what is their impact?
India has entered into an estate treaty with the UK with respect to duty payable on the estate of a deceased person. Apart from the UK, India does not have an inheritance tax treaty with any other jurisdiction.
However, since India has abolished estate duty, while the treaty is still in force, there is no impact in India on account of this treaty.
6.4 Do the estate or gift tax treaties generally follow the OECD or another model?
The only estate treaty is that with the UK (refer to question 6.3), which is also not used hence we have not analysed the same.
7.1 What are the relevant private international law (conflict of law) rules on succession and wills, including tests of essential validity and formal validity in your jurisdiction?
Succession of an immoveable property is always governed by the law of the land where it is situated (lex situs). However, it is the law of the testator’s domicile that governs succession of their moveable properties. Further, in India, it is the personal law applicable to the testator that determines their rights in relation to a will. For example, the will of Hindus, Jains, Buddhists or Sikhs will be governed as per the Hindu Succession Act, 1956, which is the personal law applicable to succession of such an individual. Similarly, the personal law applicable to the wills of Parsis or Christians is the Indian Succession Act, 1925 (ISA), and the rules of Islamic law are applicable to Muslims.
Private international law in relation to an individual’s succession is recognised by Indian courts. As mentioned above, intestate succession is governed by applicable personal laws, therefore, intestate succession of immoveable property situated in India would be governed by the personal law of the deceased, despite being of foreign domicile.
A grant of probate of a foreign will, proved in a competent court, can be resealed in India. This shall suffice as evidence of the authenticity of the will following which Indian courts are authorised to grant an ancillary probate, i.e., ‘reseal’ the probate, and grant letters of administration in India. However, it is important to note that although Indian courts do recognise private international law and even actively facilitate its application to foreign citizens/religions, in the event of conflict, Indian law with respect to immoveable properties in India, will prevail.
7.2 Are there particular rules that apply to real estate held in your jurisdiction or elsewhere?
Succession of real estate property in India is governed by the personal laws of the individual in case of intestate succession, and may further devolve as per the different sub-categories of schools within the respective personal laws. For example, Shia and Sunni schools within Islamic law have their own specific instructions as to devolution of property. Similarly, the Dayabhaga and Mitakshara schools each specify a particular way to measure and divide property within Hindu Undivided Family law.
8.1 Are trusts recognised in your jurisdiction?
Yes, trusts are recognised under Indian law. The Indian Trusts Act, 1882 (Trusts Act) is the principal legislation which recognises and governs the rights and obligations of trustees, settlors and the beneficiaries of a private trust. Public trusts set up in India are categorised into charitable and religious trusts and are governed by – the Charitable and Religious Trusts Act, 1920; the Religious Endowments Act, 1863; the Charitable Endowments Act, 1890; and are additionally regulated by specific state legislations such as the Maharashtra Public Trusts Act, 1950 and the Gujarat Public Trusts Act, 1950.
8.2 How are trusts taxed in your jurisdiction?
A private trust can be categorised either as (i) revocable or (ii) irrevocable, and further as (a) determinate or (b) discretionary. A settlor of a ‘revocable’ trust has the power to reassume the asset which has been settled in the trust, while a settlor of an ‘irrevocable’ trust does not have such powers. Further while the interest of a beneficiary is pre-determined in case of a ‘determinate’ trust, in case of a ‘discretionary’ trust, the trustee is bestowed with the power and discretion in respect of share and timing of distribution of income and assets.
Trusts do not have a separate legal personality in India and are not taxed as a separate taxable unit. The type of trust determines how the trust shall be taxed.
In the event that the trust is a revocable trust, the income of the trust is taxed in the hands of the settlor. In case of an irrevocable discretionary trust, the income of the trust is taxed in the hands of the trustee, while in case of an irrevocable determinate trust, the income of the trust can be either taxed in the hands of the trustee or in the hands of the beneficiaries to the extent of their interest in the trust. Once the income is taxed, either in the hands of the trustee or the beneficiary (as in case of a determinate trust), there is no further taxation when it is distributed.
A recent amendment to the ITA has introduced a provision which expressly exempts from the purview of taxation any income or property received from an individual by a trust created or established solely for the benefit of ‘relatives’ of the individual. Therefore, a settlement or contribution by a settlor or any other individual to a private trust is now expressly excluded from taxation in the hands of the beneficiaries, so long as the beneficiaries are ‘relatives’ of such settlor/contributor. Prior to this amendment, it was unclear whether the settlement or contribution to a private trust would trigger a tax in the hands of the recipient as ‘income from other sources’ since the settlement or contribution was without consideration.
8.3 How are trusts affected by succession and forced heirship rules in your jurisdiction?
Under some personal laws, forced heirship rules take precedence over the personal wishes of the deceased. For instance, the rules of community property entailed in the Portuguese Civil Code, 1860, devolution of interest as per Sharia law and devolution of ancestral property as per Hindu law. In general, however, the wishes of the settlor as set out in an inter vivos trust would take precedence except in very specific and certain situations, which need to be examined on a case-by-case basis.
8.4 Are foundations recognised in your jurisdiction?
No. The only foundations which are recognised are charitable organisations, often colloquially referred to as foundations.
8.5 How are foundations taxed in your jurisdiction?
Foundations are not recognised in India.
8.6 How are foundations affected by succession and forced heirship rules in your jurisdiction?
Foundations are not recognised in India.
9.1 Are civil partnerships/same-sex marriages permitted/recognised in your jurisdiction?
Civil partnerships and same-sex marriages are not recognised in India. Section 377 of the Indian Penal Code, 1860 (IPC) prohibits sexual relationships between members of the same sex. The Indian Supreme Court (SC) has previously upheld the constitutional validity of Section 377 of the IPC (Suresh Kumar Koushal v. Naz Foundation, 2013). However, importantly, with the SC recently recognising the right to privacy of an individual as an inalienable, inherent and natural right, to be read as part of the right to life and personal liberty guaranteed to an individual under the Indian Constitution; such previous judgments upholding criminalisation of same-sex relationships, may no longer have a jurisprudential basis (Justice K S Puttaswamy (Retd) v. Union of India & Ors, 2017).
9.2 What matrimonial property regimes are permitted/recognised in your jurisdiction?
Portuguese law as applicable in Goa recognises the principle of community property whereby assets of a married couple are considered to be common assets and cannot be alienated by a spouse without the express consent of the other spouse (unless contracted otherwise by the couple).
Hindu law recognises the concept of streedhan whereby any property received by a woman as a gift on account of her marriage, or at any time subsequent, is recognised as her absolute property.
Muslim law recognises the right of a wife to ‘mehr’, which is payment made by the husband or his family at the time of marriage (or in some cases, at the time of divorce). The SC has recognised that mehr is an unsecured charge on the estate of the deceased husband, and the widow’s right to mehr precedes the right of other heirs.
The Married Women’s Property Act, 1874 (MWP) provides that earnings of a married woman both prior to and after marriage shall be her separate property. This Act accords security to the wife and her children in case of life insurance policies. Certain provisions of MWP pertaining to life insurance have been extended to Hindu, Jains, Buddhists, Sikhs and Muslims.
Except as stated above, India does not recognise community property in respect of married couples.
9.3 Are pre-/post-marital agreements/marriage contracts permitted/recognised in your jurisdiction?
Pre-marital/post-marital agreements are not expressly recognised in India. There is a divide in the judicial opinion on the validity of pre-nuptial agreements in light of how personal laws treat marriage (for example, Muslim law treats marriage as a contract, whereas Hindu law does not).
9.4 What are the main principles which will apply in your jurisdiction in relation to financial provision on divorce?
Award of maintenance on judicial separation, and alimony on divorce, are primarily governed by personal laws. Either spouse under Hindu law or Parsi law may require the other spouse to pay alimony on divorce. A Christian woman has the right to seek alimony from her husband. Similarly, a Muslim woman has a right to seek maintenance from her husband after divorce. In a landmark decision, the SC has also recently held the “triple talaq” or instant divorce practice that was recognised under Muslim customary law, as unconstitutional. The SC in a split, majority verdict (3:2), has sought to establish that it is the Parliament or courts of India that should reform religious or personal laws if they are unconstitutional, and not the community itself.
Apart from personal laws, the Code of Criminal Procedure 1973 requires a husband to pay maintenance to his divorced wife irrespective of their religion and personal laws.
10.1 What restrictions or qualifications does your jurisdiction impose for entry into the country?
Any foreign national who is not an Indian citizen requires a valid visa for visiting India. The type of visa required depends on the purpose of visit (for example, tourist, business, diplomatic, journalist, student, employment, etc.). Each visa category requires submission of specified valid documents and is subject to conditions (such as period of validity, entry into India). Foreign residents who hold a valid Indian passport do not require a visa to enter India. Overseas citizens of India (OCI) cards may be issued to persons of Indian origin which enable such persons to enter India without a visa. Further, the Indian government has notified that PIO card-holders who hold a valid passport shall be deemed to be OCI cardholders and thereby eligible for entry into India without a visa.
10.2 Does your jurisdiction have any investor and/or other special categories for entry?
No, there are no such provisions in India.
10.3 What are the requirements in your jurisdiction in order to qualify for nationality?
A person can acquire Indian citizenship by birth, descent, registration and naturalisation. The conditions and procedure for acquisition of Indian citizenship are as per the provisions of the Citizenship Act, relevant provisions of which have been set out below.
- Birth: A person who is born in India after 3rd December 2004 to parents who are Indian citizens shall be deemed to be a citizen of India by birth.
- Descent: Parents of a person born outside India after 3rd December 2004 whose parents are citizens of India need to declare within one year that such person does not hold a passport of another country and his/her birth should be registered with the Indian consulate within one year of his/her birth.
- Registration: PIOs and persons who are married to Indian citizens who are resident in India for seven years can register under the Citizenship Act, and if they are resident in India for seven years and have resided in India throughout the year preceding the year of the application, they can obtain citizenship through registration. For an OCI, the requirement for residence in India has been reduced to five years.
- Naturalisation: Foreign nationals who are ordinarily resident in India for 12 years and have resided in India throughout the year preceding the year of the application can obtain citizenship through naturalisation.
10.4 Are there any taxation implications in obtaining nationality in your jurisdiction?
There are no specific tax implications arising on account of obtaining nationality since taxation under the ITA is residence-based except in certain cases where a NR who is a citizen of India may have certain beneficial tax treatment under the ITA (refer to question 1.2).
10.5 Are there any special tax/immigration/citizenship programmes designed to attract foreigners to become resident in your jurisdiction?
There are no such provisions.
11.1 What automatic exchange of information agreements has your jurisdiction entered into with other countries?
Apart from the DTAA and TIEA (refer to question 6.1), India has also ratified the Convention on Mutual Administrative Assistance in Tax Matters (Convention) in 2012. Being a signatory to the Multilateral Competent Authority Agreement 2014, India is an early adopter of the Common Reporting Standard (CRS) and has begun exchanging information relating to accounts in financial institutions held by non-residents from the year 2017. The first batch of information was shared on 1 June 2017, for information pertaining to the year 2016 onwards. Further, India has implemented Action 13 of the Base Erosion and Profit Shift (BEPS) project by including provisions of country-by-country reporting for large taxpayers. India has also joined hands with 68 countries in signing the MLI which has paved the way for actual implementation of recommendations under the BEPS project. In order to exchange information of US persons holding financial accounts in Indian financial institutions, India has signed the Inter-Governmental Agreement with the United States (US) to implement the Foreign Account Tax Compliance Act (FATCA). The rules for implementing FATCA have also been codified in India’s domestic laws. It is also relevant to note that the ITA creates an obligation on taxpayers to maintain records of certain financial transactions (for example, the sale or exchange of property, provision of services, etc.) and furnish a statement of such transactions to the tax authorities in the specified format.
11.2 What reporting requirements are imposed by domestic law in your jurisdiction in respect of structures outside your jurisdiction with which a person in your jurisdiction is involved?
The ITA requires an ROR who has assets located outside India to declare the same in Schedule FA of the income tax return filed by such tax resident. This includes signing authority in an offshore bank account, even if the individual is not a beneficiary as well as settling an offshore trust. In case of transfer of shares of an offshore company which derives substantial value from assets located in India through or in an Indian entity, the Indian entity is required to report the change of shareholding in its parent, intermediaries and ultimate shareholder foreign entities. From an Indian tax compliance perspective, the ITA now requires compulsory quoting of Permanent Account Number (PAN) in specified cases (such as purchase of securities, debentures and bonds, land, etc. above specified thresholds). Recently, the Indian Government has introduced laws to enable reporting of offshore assets and income, that defaulting taxpayers had previously refrained from disclosing.
11.3 Are there any public registers of owners/beneficial owners/trustees/board members of, or of other persons with significant control or influence over companies, foundations or trusts established or resident in your jurisdiction?
While there are no specific registers maintained in India for the parties to private trusts, corporate, property and trust laws in some instances reflect the details of the trustees (legal and beneficial owners). For instance, transfer of property laws read in conjunction with trust laws stipulate the mandatory registration of a trust deed (as an instrument of conveyance) where immoveable property is settled to the trust. Such registration then becomes part of the public record maintained by the relevant Sub-Registrar of Assurances.
Similarly, the register of shareholding of a company, as well as of directors maintained under the Companies Act, 2013 requires disclosure of beneficial interests in shares of a company to be filed with the registrar of companies, including cases wherein the trustee holds the shares for the benefit of the beneficiaries.
The authors are extremely grateful to Ms. Prajakta Menezes (Principal Associate, Indirect Tax Practice), Mr. Pranay Sahay (Senior Associate, Indirect Tax Practice) and Ms. Virja Dange (Associate, Private Client Practice), for their assistance and valuable inputs in preparing this chapter.