Chambers Global Practice Guide on Private Wealth 2021 (India Chapter)
1 . TA X
1.1 Tax Regimes
India does not currently have estate/inheritance tax. Therefore, it is the Indian income tax regime that is most frequently relevant to the concerns of individual clients and the estates, trusts or entities they set up.
Income tax in India is levied by the central Income Tax Act, 1961 (ITA) and follows a scheduler approach to the taxation of income. The five categories of income are:
• income from salaries;
• income from house property;
• business income;
• capital gains; and
• other income.
The most commonly applicable transfer taxes are the capital gains tax and an income tax on gifts between non-relatives (see Income Tax Planning for Private Clients, below). The maximum marginal tax rate applicable to the “total income” of individuals is 30%. Individuals may be subject to a surcharge ranging from 10% to 37%, which would result in an eﬀective maximum rate of 42.74% in the highest band. All taxpayers, including individuals, are subject to a “cess” (tax/levy) of 4% over tax and surcharge.
The tax rate currently applicable to corporations is 25% to 30% for Indian corporations, depending on their turnover, and 40% for foreign corporations. Lower rates may be available for certain kinds of corporations. Corporations are also subject to a surcharge of 2% to 12%, depending on their residency and other turnover.
Non-corporate entities such as partnerships are taxable based on their individual composition and circumstances. Capital gains are not subject to ordinary/progressive slab rates of income tax. Capital gains tax is levied at a ﬂat rate that varies from 0% to 40%, depending on the residence and type of taxpayer, the type of capital asset and the holding period of the asset. Gift taxes are levied at ordinary rates under the residuary income category to property received at no consideration or at a consideration that is lower than fair market value. Gifts from specified relatives are exempt, as are trusts created for the benefit of specified relatives. Inheritances are also exempt. Income from real property is taxed at the applicable slab rates of an individual under the category “income from house property”. This tax is applicable to individuals regardless of their residency status in India.
Estate Duty and Wealth Tax
At present, India does not have any inheritance tax, estate duty or wealth tax, although there is talk of introducing such.
International Tax Provisions
Under the ITA, Indian residents (including individuals, companies, partnership firms and other entities) are taxed on their worldwide income, whereas non-residents are taxed only on Indian sourced income. The residence of individuals is determined on the basis of a day-count test of physical presence in a given financial year and/or over a specified number of previous years. The residence of entities depends on the nature of the entity. Companies are considered resident if they are incorporated in India or have a place of eﬀective management in India. Partnerships are considered resident if they are organized in India or have a fraction of control and management in India. The residency rule for trusts is not specified in the ITA. As trusts do not have legal personality and are otherwise taxable under the representative assessee provisions, an oﬀshore trust could have Indian residency exposure in one of the following circumstances:
• if any fraction of the control and management of the trust is in India (eg, if one member of the board of trustees is resident in India); or
• if all the beneficiaries of a discretionary trust are resident in India.
Hybrid entities would first need to be classified as corporations/partnerships or as an entity recognised in India before their Indian residency status may be determined.
India has a vast network of tax treaties. If tax treaty benefits are available, the domestic ITA shall only be applicable to the extent that it is more beneficial. Therefore, it is vital to evaluate the impact of any relevant tax treaty on a structure. India has been an active participant in base erosion and profit shifting (BEPS) discussions and is a signatory to the multilateral instrument (MLI), which was ratified on 12 June 2019. A total of 93 notified treaties are “covered tax agreements” modified by the MLI, which would also be relevant to evaluate while planning.
Income Tax Planning for Private Clients
In the absence of an inheritance tax or wealth tax in India, income tax is a key consideration for private clients and their succession plans. For example, no income tax is levied on inheritance. However, gifts and trusts can be subject to income tax, depending on the beneficiaries and how the bequeathals are structured. A gift or trust in favour of a “non-relative” could result in a tax on the recipient at ordinary rates. Gifts, trusts and bequeathals will also result in varying stamp duty and registration cost considerations. Therefore, the choice of whether to bequeath assets through a will, lifetime gift or trust usually involves a trade-oﬀ between relevant income tax consequences versus non-tax consequences, such as Indian exchange controls and asset protection benefits. A non-resident is not permitted to purchase or receive a gift of real estate comprising agricultural land, a farm house or plantation property under Indian exchange control regulations. Similarly, Indian capital gains tax applies at differential rates depending upon the nature of the asset, the holding period of the asset and, in some situations, the method of transfer (such as a sale of listed securities on/oﬀ the exchange).
1.2 Stability of the Estate and Transfer Tax Laws
In general, private clients in India are prepared for tax uncertainty, which could derive from periodic domestic amendments to the ITA, a recent slew of amendments to the international tax regime or discussions around the potential introduction of an estate tax. Their approach regarding this state of flux is to plan on the basis of existing provisions, while ensuring they keep themselves updated regarding future tax changes.
On the domestic front, the ITA is substantially amended on an annual basis, so it is important to keep up to date on any changes. The Indian international tax regime is also in a state of periodic updating due to global developments such as BEPS, a worldwide movement towards information exchange and tax transparency, and a growing emphasis in India on tax substance to allow treaty benefits. Periodic amendments have been introduced over the last few years to reflect BEPS proposals. Furthermore, India ratified the MLI and has notified treaties with 93 countries to be “covered tax agreements” modified by the MLI.
A third kind of uncertainty relates to the possible introduction of an estate tax or inheritance tax in India. As mentioned in 1.1 Tax Regimes, India does not currently have any form of death tax. Estate duty was previously in force from 1953 to 1985, but it was abolished as it did not meet the twin objectives for which it was introduced – namely, to reduce unequal distribution of wealth and assist Indian states in financing their development schemes. In addition, the cost of administering the estate duty was found to be high. There have been talks about the reintroduction of estate duty for a few years now, but it is uncertain when it will be introduced, if at all. This uncertainty has not prevented families from planning for the potential introduction of a duty – eg, several families and high net worth individuals have set up trusts in India over the last few years in expectation of the introduction of estate tax.
Income Tax Changes and Key Responses to COVID-19
Indian income tax law is amended on an annual basis. Some key recent amendments brought about by the Finance Act, 2021 and the tax authorities are summarised below.
Change in tax residency rules
In 2020, reliefs were introduced for financial year 2019-20 to address the risk that some individuals may become Indian tax-resident on account of COVID-19-related travel restrictions. For financial year 2020-21, Indian tax authorities have clarified that if an individual was dual tax- resident due to the pandemic but unable to claim tax treaty relief, he or she could approach the Indian tax authorities for relief on a discretionary basis. The above disregard does not apply for the purposes of determining corporate tax residence.
Tax exemptions relating to COVID-19 relief
Indian government has recently announced tax exemptions and benefits for individuals receiving financial help for COVID-19-related medical treatment expenses and ex-gratia payments to family members of a person from employers/any other persons on the death of such person on account of COVID-19. Necessary legislative amendments to the above are expected to be made shortly.
Procedural tax amendments
Significant amendments have been made in relation to the limitation period during which assessments may be reopened. This period has been reduced to three years from the relevant assessment year, after which reassessment may only be done in limited circumstances. Several other significant procedural changes have also been introduced in response to COVID-19, including an extension of timelines for filing tax returns, an extension of timelines for providing tax deduction certificates and a reduction of interest due.
Meaning of “liable to tax”
The Finance Act, 2021 has also clarified and expanded upon the meaning of the term “liable to tax” in the context of the definition of “resident” in India’s double tax treaties. It also clarified that the term should be interpreted with reference to “a country” to avoid any potential misinterpretation.
Tax treatment on reconstitution of partnerships
Amendments have been introduced in relation to the reconstitution of partnerships, which render partners and firms liable to tax upon the retirement of a partner from the partnership.
Other Legal Developments
Amendments to the Foreign Contribution Regulation Act
Significant amendments have been introduced in relation to the manner in which Indian charitable entities can receive foreign contributions (from foreign donors). For example, entities that receive foreign contributions are no longer permitted to transfer such contributions to other non-profit entities, and are required to use the foreign contributions themselves. Changes have also been introduced that reduce the permitted cap for administrative expenses, and require new applicants to open an FCRA account with a stipulated bank. New identification requirements have also been introduced for persons making applications under the legislation.
Restriction on foreign investment
Prior government approval is now required for any foreign investment in an Indian company, if the acquirer or beneficial owner of such investment is based out of a country that shares land borders with India (which would include China), including in relation to subsequent transfers of such investments.
The securities regulator, the Securities Exchange Board of India, released a consultation paper in February 2021 to introduce a regime for sophisticated investors (Accredited Investors/AIs) in India’s securities market. AIs would benefit from light touch regulation, exclusive access to certain financial products and lower thresholds for minimum investible funds. Eligible AIs are proposed to include individuals, family trusts, non-family trusts and corporate bodies, whether resident in India or not, if they meet the respective thresholds for net worth, annual income or assets under management.
Resident beneficiary of an offshore discretionary trust
In Yashovardhan Birla v DCW, the Mumbai Income Tax Appellate Tribunal (ITAT) held that if a resident beneficiary of an offshore discretionary trust settled by a non-resident has the power to change trustees, such beneficiary could not be considered to own the trust’s assets.
Taxation of employee stock ownership plans exercised by non-residents
In Unnikrishnan VS v ITO, the Mumbai ITAT held that the exercise of employee stock ownership plans (ESOPs) is subject to tax in India if granted to a resident as consideration for services rendered in India even if the ESOPs were exercised while the holder was a non-resident.
1.3 Transparency and Increased Global Reporting
Tackling actual/perceived tax abuse is a strong priority for the Indian government, which has taken several measures to this end in the recent past, through the introduction of specific anti- avoidance rules and a general anti-avoidance rule, as well as several procedural changes to the manner in which information is collected and processed.
Information Disclosure and Collection
Non-residents who were residents of India when a given foreign asset was acquired now fall under the purview of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. Previously, only broad disclosures by Indian residents in relation to foreign income and assets were required. India has also expanded its Tax Information Exchange Agreement network in the last few years, and has begun to implement BEPS recommendations on country-by-country reporting.
2.1 Cultural Considerations in Succession Planning
India ranks third in the world (after China and the USA) in the list of countries with the highest number of family-owned businesses, the majority of which are in their third generation. Joint family structures are widely prevalent. However, the younger generation is more likely to be foreign-educated with diﬀerent value systems, may want to set up a nuclear family, etc. Women are increasingly prominent and play a critical role in succession plans, more so in South India and cosmopolitan cities. At the same time, patriarchs are often reluctant to cede control, particularly to persons other than their son. These are some of the broad cultural factors that inﬂuence succession planning in India. Having said this, it is important to keep in mind that India is a large and diverse country, where stark diﬀerences exist from region to region.
The framework of personal laws in India also has a deep cultural component. Testamentary succession for Hindus, Buddhists, Jains and Sikhs is governed by both the Hindu Succession Act, 1956 (HSA) and certain provisions of the Indian Succession Act, 1925 (ISA), while testamentary succession for Muslims is governed by customary personal law. Both intestate and testamentary succession for Christians, Jews and Parsis is governed by the ISA. To the extent that these laws are not civil/secular laws, they are based on the customary law applicable to the relevant community.
2.2 International Planning
With the Indian diaspora being prominent in different parts of the world, and with emigrants continuing to maintain strong emotional links with India, cross-border succession planning is common and a vital area for any private client adviser. At the same time, Indian tax laws, exchange control restrictions and a web of personal laws make such planning complex.
The exchange control regime is one of the most important factors in inﬂuencing the structure of a succession plan. The general rule is that capital account transactions are prohibited unless they are specifically permitted, whereas current account transactions are freely permitted unless they are specifically prohibited. Specific regulations are applicable to diﬀerent forms of cross-border transactions, such as transfers of shares between Indian residents and non-residents, transfers of Indian properties to non-residents, inﬂow and outﬂow of foreign exchange from India, etc. This means that most cross-border wealth transfers from private clients in the form of lifetime gifts, testamentary or intestate bequests or settlement of trusts are required to be evaluated for compliance with exchange controls. While inheritance by individuals is permitted and relatively straightforward, planning through any form of intermediary entity such as a trust or foundation (eg, where Indian-resident parents give to an oﬀshore trust) can create challenges.
Issues may also arise in relation to the characterisation of oﬀshore entities. For example, India does not have the concept of foundations. A discretionary private foundation may therefore be classified as a corporation (having separate legal personality) or a trust (on account of the discretionary beneficiary structure). If a non-resident Indian were to set up a private foundation and subsequently relocate to India or appoint a foundation board in India, this could create questions in India regarding the residence status of the oﬀshore foundation. If it is classified as a trust with “trustees” in India, it would potentially expose the entire income of the foundation to tax in India.
2.3 Forced Heirship Laws
India does not have any forced heirship laws applicable to Hindus (including Buddhists, Jains and Sikhs), Christians or Parsis; such persons may freely bequeath their property as they deem fit. Hindus are subject to a form of forced heirship on ancestral property and any property voluntarily added to the joint family pool.
Forced heirship laws are applicable to Muslims and also to persons resident in the Indian state of Goa (irrespective of their religion). A Muslim cannot by will dispose of more than one third of the surplus of their estate unless the consent of the legal heirs is obtained. Goan residents are subject to community property rules and some forms of forced heirship.
2.4 Marital Property
For the most part, India follows the separate property regime, whereby each spouse leaves the marriage with the property to which he or she holds a title. The only exception to this rule is in the state of Goa, which imposes a form of community property rules. Spouses may enter into prenuptial agreements contrary to this general custom but such agreements have to be registered (and notarised by special notaries as per the Goa Succession Act) in order to have binding effect.
Other religions recognise maintenance obligations towards wives. For example, Hindu law recognises the concept of stridhan as property belonging to a female Hindu of which she is the absolute owner. Muslim law recognises the concept of mahr, which is a sum of money or property that a wife is entitled to receive from her husband in consideration of the marriage.
Prenuptial and Post nuptial Agreements
Prenuptial and post nuptial agreements are not expressly recognised in India. However, they may be enforceable, like any other contract, if they satisfy essential requirements under the Indian Contract Act (such as the consent of both parties, lawful object, lawful consideration, etc) and if they are not contrary to public policy or any proven custom or personal law. The following kinds of agreements have been held not to be enforceable:
• agreements mandating conditions for the separation of the couple if this is considered to induce the parties not to perform their marital obligations;
• agreements affecting parental authority in relation to minor children (eg, an agreement to block the rights of minor children to maintenance or an agreement by the father to entirely give up custody and control of his child unless it is part of a separation agreement);
• agreements where a parent agrees to give a minor in marriage for a fee; and
• agreements to make payments in the nature of a dowry – this is opposed to public policy and is also now void and punishable under the Dowry Prohibition Act, 1961.
As a general note, certain personal laws consider a marriage to be a sacramental union and not merely a contract. This has influenced courts in their opinion on whether the rights and duties of married parties may be varied by contract. For example, in the case of a marriage under Hindu law, the courts have taken the position that since a marriage is not just a contract but also a sacrament, the rights and duties of married parties may not be varied by their agreement and are governed by Hindu law (AE Thirumal Naidu v Rajammal, AIR 1968 Mad 201). The position regarding the validity of such agreements is clearer under Muslim law, which treats marriage as a contract and not a sacrament. Similarly, Goan law specifically provides for the registration and notarisation of prenuptial agreements (as discussed above).
Even in situations where agreements are held to be unenforceable, their contents may be taken into consideration by the court in certain cases as a guiding factor to determine the intent of the parties.
2.5 Transfer of Property
The acquisition of property by way of a gift from relatives or by inheritance does not have any effect on the cost basis of the property, as these transfers are exempt from income tax and capital gains tax. Therefore, the cost basis of the transferor carries over to the recipient of the gift/ inheritance.
2.6 Transfer of Assets: Vehicle and Planning Mechanisms
There are a limited number of wealth planning vehicles in India. Depending on the person’s specific requirements or planning objectives, the most commonly utilised options to transfer assets are:
• a will;
• a private trust; or
• a family settlement agreement (or a combination thereof).
A will tends to be the most cost-effective option as there would be no inheritance tax or stamp duty. On the flip side, a will would offer no asset protection against future creditor claims or future inheritance tax (in the event inheritance tax is reintroduced in India) and would entail a time-consuming probate process at the time of execution.
A private trust (either as a standalone option or in combination with a family settlement) would result in stamp duty and operational costs but would be beneficial from an asset protection and future inheritance tax standpoint. It is pertinent to note that some of these considerations (eg, stamp duty costs and probate costs) differ for each Indian state and would need to be analysed as per the applicable state laws.
Family Settlement Agreements
Family settlement agreements are frequently put together in dispute situations and are considered to be tax-neutral, subject to the satisfaction of certain conditions in the ITA, including that the transfer should take place between individual participants to the agreement. It is also possible to transfer assets through lifetime gifts without any income tax consequences, provided that the donor and donee are “relatives” as per the statutory definition in the ITA. Stamp duty may be applicable depending on the applicable state legislation.
2.7 Transfer of Assets: Digital Assets
India does not have specific legislation governing the disposition (both testamentary and intestate) of digital assets. The Information Technology Act, 2000 applies to all digital information and assets, but does not address succession. Therefore, such assets (including email accounts, digital photographs, cryptocurrency, etc) would be classified as “movable property” under the General Clauses Act and subject to the rules applicable to other kinds of movables. This means that they may be bequeathed under a will or transfer under the principles of intestate succession.
Digital Assets in Testate and Intestate Succession
While writing wills, testators tend to focus on traditional assets, and digital assets are often relegated to the residual provisions. If such residual provisions contemplate equal division amongst multiple heirs, the right to manage and benefit from digital assets would then be held equally by all such heirs, who may not always agree. This has resulted in contentious situations in India in the past over intangibles with financial value – notably, IP rights such as trade marks and copyrights in film scripts. In the absence of a will, the rules of intestate succession under the relevant personal law would apply. As digital assets are classified as movable property, heirs would need to obtain a succession certificate from the relevant court in India to obtain possession, and ownership would most likely be split. In both intestate and testate succession, digital assets (including cryptocurrency) would be treated as a capital asset and there would be no tax at the time of inheritance. The heir would inherit the cost basis of the previous owner and be subject to capital gains tax upon the sale of the asset.
Legality of Virtual Currencies
Regarding the legality of cryptocurrency, the Supreme Court set aside a circular issued by the Reserve Bank of India (RBI) on virtual currencies in Internet and Mobile Association of India v RBI (WP(C) No 528/2018). The Supreme Court held that the RBI failed to establish how entities regulated by it have been adversely affected on account of the interface with virtual currency exchanges. In light of this judgment, RBI’s regulated entities were not restricted from providing banking-related services in relation to the purchase/sale of virtual currencies. The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 was proposed to be introduced in this year’s parliament session but it is currently facing delays. The contents of the bill are not yet available in the public domain. The objective of the bill is to create a facilitative framework for the creation of the official digital currency to be issued by the RBI and to regulate private cryptocurrencies in India.
3. TRUSTS, FOUNDATIONS AND SIMILAR ENTITIES
3.1 Types of Trusts, Foundations or Similar Entities
Foundations are not recognised in India. Trusts are recognised and are the most commonly used entity for estate planning purposes, given the flexibility they afford and the neutral tax treatment.
Determinate trusts are treated as fiscally trans- parent entities in India and their income may be taxed in the hands of the beneficiaries or the trustee. Trustees are the representative assessees of a trust, and their obligations depend on the beneficiaries they represent. If the beneficiaries or their shares are discretionary or if the trust has business income, the trust is taxable at the maximum marginal rate. If the trust is a revocable trust, the author or settlor continues to be taxable on the income of the trust, as the transfer is disregarded for tax purposes. Private trusts in India are governed by the Indian Trusts Act, 1882 (Trusts Act), whereas public trusts are governed by the relevant state legislation and common law principles in the absence of specific legislation.
Hindu Undivided Family
Hindus may also set up a Hindu Undivided Family (HUF) to hold joint family property. It consists of the common ancestor and all his lineal descendants up to any generation, together with his wife. An amendment in 2005 recognised the rights of daughters (both married and unmarried) as coparceners being entitled to a share in the HUF property in the same manner as sons. The income tax rates applicable to resident HUFs are the same as the rates applicable to resident individuals (below 60 years), and distributions of capital assets from an HUF are not subject to further tax.
The increase in the settlement of Indian trusts over the past few years may be attributed to two key developments:
-firstly, an expectation that India will introduce an estate tax in the near future; and
– secondly, the passing of the Insolvency and Bankruptcy Code in 2016, which compelled business families to prioritise the ring-fencing of personal assets.
In contrast, the expanded gift tax regime in Section 56(2)(x) of the ITA has negatively impacted the settlement of trusts in India, particularly where the intended beneficiaries of such trusts are non-relatives such as philanthropic organisations or friends.
3.2 Recognition of Trusts
Trusts are recognised and well understood in India. Private trusts may be set up either during a person’s lifetime or under a will (ie, a testamentary trust). For tax purposes, trusts do not have separate legal personality and are taxed in the hands of either the trustee or the beneficiaries. Further information on the types of trusts in India and their tax treatment is provided in 3.1 Types of Trusts, Foundations or Similar Entities.
3.3 Tax Considerations: Fiduciary or Beneficiary Designation
The Trusts Act does not restrict the appointment of Indian citizens or residents as trustees or beneficiaries of a foreign trust and vice versa. How- ever, there is a possibility that a foreign trust that has an Indian resident as a trustee may be taxed in India on the basis that a part of its control and management is in India. Tax consequences may also arise in India if an offshore discretionary trust has all its beneficiaries resident in India, or if an offshore determinate trust has the relevant determinate beneficiaries resident in India. An Indian tax resident who is a settlor, trustee or beneficiary of a foreign trust is required to make various disclosures in his/her income tax returns on an annual basis regarding the details of the foreign trust or entity, its taxable income/assets and any beneficial interest. Broad disclosures under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 are also required to be made by Indian residents on foreign income and assets.
The Trusts Act does not place any restrictions on a beneficiary/donor also serving as a trustee. Briefly, a person can play any two of the three roles involved in a trust (ie, the roles of settlor, trustee or beneficiary).
If a settlor also acts as a trustee, it is possible that the trust may be regarded as a revocable trust under the ITA. In such a case, the settlement of the trust would be disregarded for tax purposes, and the income of the trust may be treated as belonging to the settlor.
3.4 Exercising Control over Irrevocable Planning Vehicles
Indian trust law is still at a nascent stage and is yet to introduce provisions specifically relating to settlor reserved powers. In practice, Indian trust deeds do feature such provisions, but their validity is yet to be tested by the courts.
4. FAMI LY BUSINESS PLANNING
4.1 Asset Protection
An irrevocable discretionary private trust is likely to be the most beneficial from an asset protection and (future) inheritance tax standpoint. However, its settlement results in stamp duty and operational costs. Furthermore, the settlement of a trust is not valid if it is fraudulent – eg, if it was undertaken to defeat an existing liability.
There may also be claw-backs under specific laws. For example, the income tax department also has the ability to render any transfer of assets void if it is by a taxpayer who has notice of pending litigation/tax proceedings, unless such transfer is made in good faith at fair value. This provision could potentially be used to void the settlement of a trust if there are existing tax liabilities. Furthermore, the Insolvency and Bankrruptcy Code, 2016 (IBC) is a creditor-friendly law that provides for a two-year look-back period within which “undervalued transactions” may be clawed back, if they are entered into between a bankrupt person and their “associate”. This, inter alia, includes a trustee of a trust in which the beneficiaries of the trust include the debtor.
4.2 Succession Planning
Trusts are a common vehicle for family business succession, and are typically used alongside a softer document such as a family constitution, which serves as a guideline for the board of trustees. In the absence of a trust, families may set up bodies such as a family board or family council to take collective decisions in relation to the family business. Such boards also act as a training ground for the younger members of the family and may also be guided by a family constitution or a vision document.
The settlement of trusts in favour of relatives, or bequeathal through a will, is currently not subject to income tax in India. Therefore, these business succession strategies do not involve a material income tax component unless an internal corporate restructuring of the group holding is required. Such restructuring is frequently required at the point of creating the succession plan, to rationalise the family holding structure as well as render the succession plan enforceable. Such restructuring requires a close analysis of tax consequences. For example, if the family business is held in the form of listed securities, which the family wishes to settle into a business succession trust, an exemption would likely be sought from the securities regulator under the Takeover Code. Similarly, if the family holding consists of valuable real estate, the stamp duty consequences of setting up a succession structure such as a trust are often significant and require planning.
4.3 Transfer of Partial Interest
There are few crystalized valuation norms applicable to such transfers, particularly since there is no estate tax in India. Lifetime gifts between relatives are also generally exempt, as a consequence of which such transfers of partial interest are often not taxable. Having said this, it would be standard practice for an accountant to factor lack of marketability into the valuation of any asset.
5. WEALTH DISPUTES
5.1 Trends Driving Disputes
Based on statistics for the period 2012 to 2017, disputes relating to the recovery of money constitute 30.2% of disputes in India, followed by land and property disputes (29.3%) and family disputes (13.5%). In addition, about 80% of land and property disputes in India relate to ownership or inheritance disputes. A substantial number of family disputes are referred to mediation and other forms of alternate dispute resolution.
High-value family disputes amongst high net worth individuals and ultra high net worth families are particularly likely to be settled through a non-public means such as mediation. Trust disputes (ie, disputes between trustees and beneficiaries) are not currently arbitrable, even if the trust deed contains an arbitration provision. If such disputes are expected, it is recommended that trustees and beneficiaries sign a specific arbitration agreement.
5.2 Mechanism for Compensation
Family and wealth disputes in India may be resolved by approaching a Civil Court or Family Court (depending on the nature of the suit). Civil Courts have jurisdiction over suits relating to property, certain family matters such as the appointment of guardians, and the administration of trusts. Family Courts typically have jurisdiction over matrimonial matters such as suits for declaration of the validity of marriage or spousal status, suits regarding property of spouses (joint or individual), suits for injunctions arising out of a marital relationship, etc.
The nature of relief provided by the Civil Court or Family Court would depend on the nature of the suit. For example, a suit in a marital dispute may result in payments for the maintenance of wife and children, where the “compensation” would be determined very differently from a property dispute before the Civil Court. The following standard principles, among others, are applicable to the assessment of damages:
• Indian courts tend to award damages on an actual basis – consequential and exemplary damages are rare; and
• prior to the enactment of the Specific Relief (Amendment) Act, 2018, Indian law featured a preference for damages over specific performance pursuant to a breach of con- tract. However, the Specific Relief (Amendment) Act, 2018 modified this position and increased the incidence of specific relief by requiring courts to enforce the specific performance of a contract as a rule, subject to limited exceptions.
6. ROLES AND RESPONSIBILITIES OF FIDUCIARIES
6.1 Prevalence of Corporate Fiduciaries
Corporate or institutional trustees are increasingly appointed by settlors who seek independence and continuity in the management of the trust. Although they are recognised by Indian case law, there is some uncertainty regarding the validity of institutional trustee structures where the family continues to exercise a role through protectorship/settlor reserved powers, etc. Furthermore, Indian trust law does not differentiate between the standard of care to be exercised by a corporate trustee versus an individual trustee.
6.2 Fiduciary Liabilities
Trustees may only be held personally liable for a breach of their duties under the Trusts Act. This would include liability for any improper act, neglect, default or omission by a trustee in respect of either the trust property or the beneficiary’s interest in such property. Outside a breach of trust, under Indian trust law it is not possible to “pierce the veil” of a trust to hold trustees personally responsible for the liabilities of the trust. Having said this, see 4.1 Asset Protection regarding look-backs/claw-backs under specific laws such as the IBC. It should be noted that there are no Indian precedents on the validity of a private trustee company.
The Trusts Act
The Trusts Act is a basic piece of legislation dating back to 1882, and there has been limited case law on newer trust structures in India. Therefore, while most institutional trustees/fiduciaries do include detailed provisions regarding exculpation and delegation in their trust deeds, the validity of such exculpatory provisions, delegation of authority, settlor reserved powers, etc, is not always certain.
The Trusts Act states that trustees are not permitted to delegate their duties to either a co- trustee or any third party, unless:
• doing so is permitted by the trust instrument;
• the delegation is in the regular course of business; or
• doing so is otherwise considered necessary.
Trustees may also delegate their duties with the consent of the beneficiaries, provided such beneficiaries are competent to contract. However, there is insufficient clarity regarding the allocation of liabilities where there is such a delegation. Exculpatory provisions would be evaluated based on the general duties of trustees under the Trusts Act, one of which is the duty to make good the loss sustained by the trust property or beneficiary on account of the breach. Based on existing jurisprudence, such clauses should be considered to be valid to the extent that they do not exonerate trustees from more serious forms of breach (such as gross negligence and wilful default).
6.3 Fiduciary Regulation
The general standard applied to fiduciaries is that they can make investments as an ordinary prudent person. In addition, Section 20 of the Trusts Act prescribes a list of permitted investments, which the trustees may only depart from if specifically authorised by the trust deed. It is pertinent to note that the categories of investments prescribed by the Trusts Act are restrict- ed only to private trusts and do not restrict the modes of investment permissible in the case of charitable trusts, although such trusts may be regulated by state-specific statutes.
6.4 Fiduciary Investment
The modern portfolio theory is not commonly applied in India – the existing investment standard applicable to trustees is much narrower and restricts trustees to the instruments specified in Section 20 of the Trusts Act. Most trusts get around this requirement by specifically allocating powers to trustees under their deeds.
The Trusts Act does not place any restrictions on trusts holding active businesses. Trusts that run such businesses are taxable as business trusts, at the maximum marginal rate. Sometimes this creates issues when business succession trusts are set up with institutional trustees. The trust deeds of such trusts typically include anti-Bartlett provisions, but their validity is yet to be established by Indian courts.
7. CITIZENSHIP AND RESIDENCY
7.1 Requirements for Domicile, Residency and Citizenship
The requirements to establish domicile and residency vary depending on the law in question. Residency for individuals is typically established based on the period of physical stay, whereas domicile also evaluates the “intention” of said person in being physically present in India.
Under Indian private international law principles, questions of inheritance, status and marriage are determined by a person’s domicile. Immovable property is bequeathed based on its situs. Most Indian personal laws are applicable only if at least one of the persons involved is domiciled in India. Indian exchange control laws also make reference to the domicile of the individual.
Domicile generally attaches to a person at birth, and is changed by a conscious act of such person. It may therefore be classified into two types– ie, domicile by origin and domicile by choice. The domicile of origin of a legitimate child is the country in which the father was domiciled at the time of the child’s birth. The domicile of origin of an illegitimate child is the country in which the mother was domiciled at the time of the child’s birth. A person may surrender their domicile of origin by taking up fixed habitation in another place and demonstrating their intention to stay there – this is referred to as a “domicile of choice”. A minor cannot independently acquire a domicile of choice until they reach the age of majority. If a non-Indian domiciled person wishes to take on domicile in India, they are required to file a declaration before a designated officer after being resident in India for at least one year.
India has separate laws to determine residence for tax and exchange control/regulatory purposes. See 1.2 Stability of the Estate and Transfer Tax Laws for information regarding the residence test under tax law.
Under exchange control provisions, the residence test is contained in the Foreign Exchange Management Act, 1999 (FEMA), which states that a “person resident in India” includes an individual residing in India for more than 182 days during the course of the preceding financial year, unless:
• such person is in India for an uncertain period – ie, without requisite intention; or
• such person has gone out of India in such circumstances as would indicate their intention to stay outside India for an uncertain period.
FEMA also applies differential rules to non-residents who have Indian citizenship, or who are descended from Indian citizens.
Indian citizenship may be acquired by birth, descent, naturalisation or registration in accordance with the provisions of the Citizenship Act, 1955. Briefly, for persons born in India after 1950, citizenship by birth is automatically conferred if either parent of such person is an Indian citizen.
It is also relevant to highlight that India does not permit dual citizenship – this means that if a minor acquires Indian citizenship by descent but also has foreign citizenship by birth, such foreign citizenship needs to be renounced within six months of attaining the age of majority. It is also possible to apply to the central government to become a citizen by registration.
7.2 Expeditious Citizenship
In 2016, the Indian government introduced a scheme to grant Permanent Residency Status (PRS) for ten years (with a multiple-entry option) to foreign investors bringing in a minimum investment of INR100 million within 18 months or INR250 million within 36 months. The investment must also generate employment for at least 20 resident Indians every year. The spouses and children of such eligible foreign investors would also be granted PRS. If a holder of PRS wishes to apply for citizenship, they would need to make a separate application and follow the prescribed process.
8. PLANNING FOR MINORS, ADULTS WITH DISABILITIES AND ELDERS
8.1 Special Planning Mechanisms
While India does not have a special needs trust regime, it is increasingly common to use private trusts to provide for beneficiaries with disabilities. Since living wills/lasting powers of attorney are unlikely to be enforceable in India, some private clients also settle trust structures in advance, in anticipation and preparation for their own disability in the future.
Non-enforceability of Living Wills and Lasting Powers of Attorney
The non-enforceability of living wills and lasting powers of attorney is a serious setback to people who wish to plan for future contingencies with- out having to settle a trust. A living will typically states a person’s wishes as to how their property and affairs would be managed in the event they lose their mental capacity. A lasting power of attorney enables a person to appoint a representative (or next of kin) who would be authorised to make decisions concerning healthcare, property and other matters when such person is incapable of making their own decisions by virtue of physical or mental incapacity. Both are unlikely to be enforced by Indian courts. This is because there is no special legislation enabling these documents, and the Indian Contract Act, 1872 provides that an agency (including a power of attorney) would automatically be terminated in the incapacitation of the principal or agent.
Mental Healthcare Act
Some relief is available under the Mental Healthcare Act, 2017 (MHA), which provides for advance directives in matters relating to mental illness. Furthermore, in Common Cause v Union of India, the Supreme Court recently held that advance medical directives may be valid in matters of grave medical illness and passive euthanasia, subject to compliance with a detailed procedure laid down by the court. Although the ruling makes some progress towards enabling people to plan for serious/terminal conditions, there are still several open questions when it comes to the validity of advance directives for lesser medical decisions and financial decisions.
8.2 Appointment of a Guardian
Guardians and Wards Act
The principal legislation governing the rights and remedies of guardians and wards is the Guardians and Wards Act, 1890 (GWA). In addition, Hindus are governed by the Hindu Minority and Guardianship Act, 1956. There are primarily three categories of guardians:
• natural guardians – ie, the parent/s or husband (in the case of Hindus) or only the father (in the case of Muslims);
• testamentary guardians appointed by a father’s will; or
• guardians appointed under the GWA.
The appointment of natural and testamentary guardians does not generally involve any court proceeding, except in a contest situation. However, the appointment of a guardian under the GWA may be done by the relevant District Court or High Court.
Rights of Persons with Disabilities Act
The Rights of Persons with Disabilities Act, 2016 empowers a court or designated authority to appoint a limited guardian to take legally binding decisions on behalf of (and in consultation with) a person with a disability. A limited guardianship is a system of joint decision-making that operates on mutual understanding and trust between the guardian and the disabled person. Similarly, the MHA provides for the appointment of a “nominated representative” for a person with mental illness by the Mental Health Review Board (of the relevant Indian state). It is pertinent to note that a nominated representative under the MHA is only permitted to take healthcare-related decisions and not decisions in relation to the financial assets of the person with mental illness.
8.3 Elder Law
The decline of the joint family system in India has increased the importance of retirement planning among Indian senior citizens. Amongst high net worth individuals, it is common to set up trusts to plan for later years and ensure that funds are managed in a way that ensures a basic standard of living for both husband and wife. Such trusts are particularly useful in situations of medical/ physical incapacity, since living wills/lasting powers of attorney are not specifically recognised and are unlikely to be enforceable in India.
Senior Citizens Savings Scheme
The Indian government also offers several pension schemes to enable persons to prepare for their retirement. Post-retirement, senior citizens sometimes opt for the Senior Citizens Savings Scheme, which offers regular income and qualifies for a deduction under the ITA. They may also choose to set up a reverse mortgage scheme if they own a house and need regular cash flow. Senior citizens are also eligible for tax benefits, including differential tax slabs on their total income. These benefits are revised periodically.
9. PLANNING FOR NON-TRADITIONAL FAMILIES
Rights of Illegitimate Children
Under Hindu intestate succession law, children born during the subsistence of a marriage are deemed to be legitimate, regardless of whether such marriage was void or voidable. This is known as “deemed legitimacy” and typically applies in situations of bigamous marriages or other forms of void/voidable marriages. Such illegitimate children are granted a right to inherit the property of their parents as per the Hindu Marriage Act, 1955.
The benefit of deemed legitimacy is not applicable to children born from illicit/adulterous relationships. Furthermore, Section 16(3) of the Hindu Marriage Act makes it abundantly clear that illegitimate children would only be entitled to inherit the property of their parents and no other relatives. A similar provision also exists in the Special Marriage Act, 1954 (SMA), which extends to children born in marriages solemnised between persons domiciled in India (irrespective of their religion or community). There- fore, deemed legitimacy is applicable not only to children born in marriages solemnised between Hindus but also to persons belonging to other communities as well, if they were married under the SMA.
This rule does not apply to children born in marriages solemnised under a different personal law, whose situation would depend on the personal law applicable.
Rights of Adopted Children
Children may be adopted under a secular law, the Juvenile Justice (Care and Protection of Children) Act, 2015 (JJA), or under a religious personal law known as the Hindu Adoption and Maintenance Act, 1956 (HAMA).
HAMA is only applicable to adoptions by Hindus of children born to Hindus. It confers upon the adoptee the same rights and privileges in the family of the adopter as a legitimate child. Furthermore, an adopted child is entitled to inherit in the same manner and to the same extent as a natural-born child, except in certain cases (eg, if the child has been adopted by a disqualified heir).
The JJA allows adoptions by communities whose personal (religious) laws do not recognise adoption – examples being Muslim, Christian and Parsi law. Prior to the introduction of the JJA, individuals in such communities could only take on guardianship responsibilities under the GWA. However, this did not give adopted children the full rights (such as inheritance rights) of biological children. The JJA addresses this issue and children adopted under this Act are akin to biological children.
In the absence of a statute governing surrogacy in India, surrogate pregnancy arrangements are currently governed by the contract between the parties and the draft Assisted Reproductive Technique Clinics Guidelines. However, the Union Cabinet recently approved the Surrogacy (Regulation) Bill, 2020 (Surrogacy Bill, 2020) in February 2020 after incorporating the recommendations of a select committee to the erstwhile Surrogacy (Regulation) Bill, 2019 (Surrogacy Bill, 2019).
As per the erstwhile Surrogacy Bill, 2019, Indian couples would be permitted to have a child through a surrogate acting on an altruistic basis (ie, without consideration), provided that the surrogate was a “close relative” who was married and already had a biological child of her own. The condition requiring the surrogate to be a close relative has now been removed in the Surrogacy Bill, 2020 and any “willing” woman is now permitted to act as a surrogate, although commercial surrogacy continues to be restricted. In addition, non-Indian-origin couples, single men, partners in live-in relationships and homosexuals are not likely to be permitted to take advantage of surrogacy arrangements as per the Surrogacy Bill, 2020.
9.2 Same – Sex Marriage
Same-sex marriages are not recognised in India. Until very recently, homosexuality was considered criminal due to a relic in the Indian Penal Code, 1860 that criminalised “carnal intercourse against the order of nature”. This provision was struck down by the Supreme Court in Navtej Singh Johar v Union of India (Writ Petition (Criminal), No 76 of 2016) as being “irrational, indefensible and manifestly arbitrary” to the extent that it applies to consensual intercourse between adults.
Domestic partners are not expressly conferred legal status in India. However, certain cases in the recent past have recognised “live-in relationships” and conferred rights upon them in specific situations. If the partners have cohabited together for a long time, the Indian Evidence Act states that a presumption is created in favour of wedlock. Cases have also held that there is a presumption of legitimacy for children born in such relationships. This presumption may be rebutted, but a heavy burden lies on the person who seeks to disprove the legitimate relation- ship, as the law leans in favour of legitimacy.
10. CHARITABLE PLANNING
10.1 Charitable Giving
Charitable giving in India has tended to be driven more by religious/cultural factors than by laws/ tax exemptions. However, entities set up with a defined “charitable purpose” can register as tax-exempt entities under the ITA, subject to the satisfaction of certain requirements. Contributions to such tax-exempt entities are then allowed a whole/partial tax deduction in the hands of the donor. The introduction of the Corporate Social Responsibility (CSR) Rules, 2014, under which certain companies are required to contribute 2% of their net profits towards CSR activities, has given a significant boost to the non-profit sector.
10.2 Common Charitable Structures
Some Indian families choose to carry out philanthropy through their business entities under the CSR route, whereas some choose to set up separate charitable entities. The entities that are most commonly used for charitable planning are charitable/public trusts, Section 8 companies and charitable societies.
A charitable/public trust is a popular vehicle for philanthropic activities, except in specified states that have public trust legislation, such as Maharashtra. In such states, public trusts are governed by a charity commissioner, who typically has wide powers of control and over- sight over the trust’s activities. This limits the operational flexibility of trustees, who therefore sometimes prefer a Section 8 company. In states without public trust legislation, the trust deed is simply registered under the Registration Act, 1908 and is subject to the terms specified in the instrument, which allows flexibility in decision-making. However, even such public trusts (set up in unregulated states) are subject to restrictions under the ITA if they choose to apply for tax-exempt status. It is relevant to note that families previously used to include an allocation for philanthropy in private family trusts. This is now no longer common practice due to an amendment to India’s gift tax regime, which taxes settlements in favour of non-relatives (which would include a charity).
Section 8 Companies
A Section 8 company is organised under the Indian Companies Act, 2013 and is regulated by the Ministry of Company Affairs. It is similar to a private limited company, except that it is required by law to apply its income and corpus only to charitable objects. A member of a Section 8 company cannot receive remuneration or distributions from the company, barring exceptions such as reimbursements. Section 8 companies allow limited discretion over the allocation of funds, take longer to set up (80–90 days), and have high operational costs for compliance compared to public trusts.
Charitable societies are governed by the Societies Registration Act, 1860. Such entities are organisationally heavy as they are required to have a minimum number of seven persons and to file details of their governing body/managing committee members annually (ie, list of names, addresses and occupations) with the registrar of societies for that state. Societies are not typically preferred by private clients for this reason.
Taxable Private Entities
In addition to the entities listed above, philanthropy planning in India is unique to the extent that private clients sometimes carry on philanthropy through taxable private entities. This is because the regulations applicable to charitable activities are complex, and individuals and families sometimes prefer the operational flexibility afforded by private entities over tax exemptions. If any of the entities listed here anticipate receiving foreign contributions, they would need to satisfy the requirements under the Foreign Contribution (Regulation) Act, 2010.
Shreya Rao, Partner