This practice guide provides an insight into the laws and regulations governing private client practice in India and related connection factors, tax issues, succession planning, matrimonial & immigration issues, reporting requirements, etc.
1.1 To what extent is domicile or habitual residence relevant in determining liability to taxation in India?
Unless an individual is a dual tax resident in India and another country, factors such as domicile or habitual residence are not relevant to determine Indian tax liability. If an individual is a dual tax resident, domicile and habitual residence may contribute to determining his/her fiscal residence as per the tie-breaker test provided in the relevant Double Taxation Avoidance Agreement (“DTAA”).
1.2 If domicile or habitual residence is relevant, how is it defined for taxation purposes?
Domicile or habitual residence are not defined in the Income Tax Act, 1961 (“ITA”). To the extent that they are applicable in a DTAA context, the relevant commentary would need to be referred to for an understanding of the term.
1.3 To what extent is residence relevant in determining liability to taxation in India?
Tax incidence in India depends on the taxpayer’s residential status. Indian tax residents are taxed on their worldwide income, whereas non-residents and residents but not ordinarily residents (“RNOR”), i.e. individuals transitioning from being non-resident to resident for tax purposes (see question 1.4), are liable to pay tax only on the portion of income sourced from India.
1.4 If residence is relevant, how is it defined for taxation purposes?
The residence of an individual (i.e. day-count test of physical presence) is determined in accordance with the following rules laid down under the ITA:
(i) An individual is a resident if such individual: (i) is present in India for 182 days or more in a financial year; or (ii) is present in India for 60 days or more in a financial year and at least for 365 days for four years immediately preceding the relevant financial year. (The 60-day period is relaxed for certain categories of individuals.)
(ii) An individual is a RNOR if such individual: (i) is a resident in India in the relevant financial year; and (ii) is either a non-resident in nine out of the 10 years preceding the relevant financial year or is present in India for 729 days or less during the seven years preceding the relevant financial year. In any other case an individual is a non-resident.
(iii) Further, apart from the day-count test of physical presence, there are certain other criteria to determine liability to tax in India (see question 1.5).
For non-individuals the ITA provides for different tests to determine residential status based on the type of entity.
1.5 To what extent is nationality relevant in determining liability to taxation in India?
When an Indian citizen residing outside India or a person of Indian origin (“PIO”) visits India for more than 60 days in a financial year (April 1 to March 31), their nationality/nation of origin becomes relevant to relax the day-count test, which would ordinarily attract Indian tax liability (see question 1.4). Such an Indian citizen or PIO visiting India becomes an Indian tax resident if (i) he/she is physically present in India for more than 182 days in a financial year and for 365 days or more in the four years preceding the relevant financial year, or (ii) if he/she is physically present in India for more than 120 days in a financial year and for 365 days or more in the four years preceding the relevant financial year and if his/her total income, other than income from foreign sources, exceeds INR 1.5 million during the previous year.
An Indian citizen who leaves India in any previous year as a crew member or for the purpose of employment outside India shall be treated as resident in India if he/she is present in India for more than 182 days in a financial year and for 365 days or more in the four years preceding the relevant financial year.
An Indian citizen who is not liable to tax in any country or jurisdiction by reason of his/her domicile or residence or any other criteria of similar nature shall be deemed resident in India if his/her total income, other than income from foreign sources, exceeds INR 1.5 million during the previous year. For this provision, income from foreign sources means income that accrues or arises outside India (except income derived from a business controlled in or a profession set up in India).
Nationality is also relevant when invoking the non-discrimination clause in DTAAs which guarantees a foreign national tax treatment equal to that of an Indian national.
1.6 If nationality is relevant, how is it defined for taxation purposes?
“Nationality” has not been defined in the ITA. However, “Indian citizen” and “PIO” have the following meaning for tax purposes:
An Indian citizen is an individual who has acquired Indian citizenship by birth, descent, naturalisation or registration as per the provisions of the Citizenship Act, 1955.
A person shall be deemed of Indian origin if he/she, or either of his/her parents or any of his/her grandparents, was born in undivided India.
1.7 What other connecting factors (if any) are relevant in determining a person’s liability to tax in India?
Residents are taxable on their worldwide income in India. Non-residents are taxed on their India-sourced income. Favourable tax treatment granted by DTAAs can be claimed by residents as well as non-residents. Some situations where Indian tax liability may be attracted are enumerated below:
|Connecting Factor||Taxable Situations|
|Situs of property||Income earned by a non-resident from immovable property situated in India by virtue of sale or rent/lease.|
Income from transfer of offshore assets deriving substantial value from assets situated in India is liable to capital gains tax in India.
|Business connection||Income derived from business operations carried out in India is taxable to the extent attributable to the business connection of a non-resident in India under the ITA, subject to favourable tax treatment available under the DTAA.|
2.1 What gift, estate or wealth taxes apply that are relevant to persons becoming established in India?
India does not levy any estate tax or wealth tax. Gift tax under the ITA is currently applied as an anti-avoidance mechanism and not as a means to tax inter-relative gifts, which are specifically excluded. They apply to any receipt of money (exceeding INR 50,000) or other property received for no consideration or inadequate consideration, i.e. if the difference between the consideration paid and fair market value (in case of movable property) or the stamp duty value (in case of immovable property) exceeds INR 50,000 in aggregate. Gifts received inter alia: (i) from a relative (as defined in the ITA); (ii) from an individual by a trust settled for the benefit of his/her relatives; (iii) at the time of marriage; or (iv) by way of inheritance, are not subject to such gift tax.
Further, monetary gifts (exceeding INR 50,000) received by non-residents from Indian residents are taxable, subject to above exemptions (e.g. gift from relative etc.) and availability of relief under the applicable tax treaty. The Finance Bill 2023** (“FB 2023”) proposes to expand this by including RNOR within its purview, i.e. such gift received by RNOR from Indian residents shall also be taxable.
As per existing Section 56(2)(viib) of the IT Act, where a company, in which public are not substantially interested, receives any consideration from a resident for issue of shares which exceeds their face value, the difference between the consideration so received and the fair value of such shares (computed as per the methodology prescribed under the Income Tax rules) is taxable in the hands of the company as ‘income from other sources’. Issue of shares to non-residents was not covered under the provision. The FB 2023 now seeks to enhance the scope of this provision to include consideration received by the company for issue of shares to non-residents as well. This amendment is proposed to be applied from Financial Year (“FY”) 2023-24 and onwards.
Under the Liberalised Remittance Scheme (“LRS”), remittances by resident individuals up to USD 2,50,000 per Financial Year (April-March) for any permitted current or capital account transaction or a combination of both is allowed. Authorised dealers are required to collect tax at source (“TCS”) on foreign outward remittances under LRS. The FB 2023 has proposed to increase rate of TCS under the LRS (other than the remittance for education and medical treatment) from 5% to 20% with effect from July 1, 2023.
The Finance Act 2021 had withdrawn the exemption of sum received under a Unit Linked Insurance Plan (“ULIP”) (barring the sum received on death of a person), issued on or after the 1st February 2021 if the amount of premium payable for any of the years during the term of such policy exceeds Rs 2,50,000. FB 2023 proposes to withdraw the exemption in respect of sums received from other types of life insurance policies as well. It is proposed to tax income from insurance policies (other than ULIP for which provisions already exists) having premium or aggregate of premium above Rs 5,00,000 in a year. Income is proposed to be exempt if received on the death of the insured person. This income shall be taxable under the head “income from other sources”. Deduction shall be allowed for premium paid, if such premium has not been claimed as deduction earlier. The proposed provision shall apply for policies issued on or after 1st April 2023.
2.2 How and to what extent are persons who become established in India liable to income and capital gains tax?
A taxpayer becomes liable to pay income tax in India depending on the nature of the entity and its residential status. If the taxpayer is a resident individual, their age also becomes relevant to determine their tax liability. Indian residents are taxed on their worldwide income, whereas RNORs and non-residents are taxed on their India-sourced income.
Income tax in India is levied by the ITA. The ITA categorises incomes into the following five categories:
(i) income from salaries;
(ii) income from house property;
(iii) business income;
(iv) capital gains; and
(v) other income.
Incomes other than capital gains are taxed at ordinary tax rates/slab rates.
The Finance Act, 2020 had introduced a new optional regime under Section 115BAC of the ITA, whereunder individuals and Hindu undivided families (‘HUFs’) could opt to be taxed at the prescribed lower slab rates, without the benefit of claiming any exemptions and deductions available under the ITA (‘New Regime’). Under FB 2023, the Government has announced new slab rates/benefits under the New Regime; the key benefit being that the highest surcharge under the new regime would be 25% (as opposed to 37% earlier); thereby reducing the effective tax rate from 42.7% to 39% under the New Regime. The effective tax rate under the earlier regime continues to be 42.7% (i.e., with a surcharge of 37%). In effect, no changes to the earlier regime. The New Regime has been made the default regime now. However, taxpayer has the option to be governed by the earlier regime.
Further, all taxpayers, including individuals, are subject to a “cess” (tax/levy) of 4% over tax and surcharge.
The most commonly applicable transfer taxes are the capital gains tax and income tax on gifts between non-relatives. Income tax on gifts from non-relatives is levied at slab rates as mentioned above. Capital gains tax is levied at a flat rate that varies from 0% to 40% and at slab rates in certain cases, depending on the residence and type of taxpayer, the type of capital asset and the holding period of the asset. For instance – in case of a taxpayer (including resident and non-resident individual), on sale of equity shares (listed on recognised stock exchange) held for more than 12 months, the capital gains (in excess of INR 100,000) will be taxed at the rate of 10% (plus applicable surcharge and cess) and for such equity shares held for less than 12 months it is taxed at the rate of 15% (plus applicable surcharge and cess), provided Securities Transaction Tax (“STT”) is paid on such transfers. It should be noted that the surcharge is capped at 15% in respect of certain capital gains and dividend income under both the regimes (i.e. earlier regime and the New Regime).
A resident taxpayer may claim credit of taxes paid in foreign jurisdiction in terms of the provisions of the ITA and DTAA. Similarly, non-residents may claim credit of taxes paid in India against their liability to pay tax in their home jurisdictions in terms of the provisions of the applicable tax laws read with the provisions of the DTAA.
Certain exemptions and deductions are available under the ITA, for instance, sections 54 and 54F of IT Act provide for deduction on capital gains from the transfer of long-term assets if the assessee invests in a residential property in India within a specified time frame. The FB 2023 proposes to amend these provisions to limit the maximum deduction under these provisions to INR 10,00,00,000. This amendment is proposed to apply from FY 2023-24 and onwards.
2.3 What other direct taxes (if any) apply to persons who become established in India?
Apart from income tax levied under the relevant schedules of the ITA, there are no other direct taxes levied on the income earned by persons resident in India. However, certain taxes such as the equalisation levy are levied on specific transactions, whereas others such as the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (“Black Money Act”) and Prohibition of Benami Property Transactions Act, 1988 (“PBT Act”) are targeted at avoidance situations.
Equalisation Levy (“EQL”)
EQL imposed under the Finance Act, 2016 is a tax leviable on consideration received or receivable by a non-resident for any specified service such as online advertising, any provision for digital advertising space or any other facility or service for online advertising at 6% from: (i) a person resident in India and carrying on business or a profession; and (ii) a non-resident having a permanent establishment (“PE”) in India. A resident carrying on business or a profession or a non-resident having a PE in India shall deduct the EQL from the amount paid or payable to a non-resident if the aggregate amount of consideration for specified service in a previous year exceeds the prescribed amount.
The scope of EQL was further expanded by the Finance Act, 2020, to cover consideration received or receivable by an e-commerce operator for e-commerce supply or services on or after the first day of April 2020 and is levied at 2% on such consideration and made or provided or facilitated by it: (i) to a person resident in India; or (ii) to a non-resident in the specified circumstances such as sale of an advertisement that targets a customer who is resident in India or a customer who accesses the advertisement through an internet protocol address located in India, and sale of data that targets a customer or person resident in India, or who uses an internet protocol address located in India; or (iii) to a person who buys such goods or services or both using an internet protocol address located in India. E-commerce operator means a non-resident who owns, operates or manages a digital or electronic facility or platform for the online sale of goods or online provision of services or both. The aforesaid amount of EQL shall be paid by the e-commerce operator.
When EQL is deducted in terms of the aforesaid provisions, the income of the recipient non-resident is exempt from tax under the ITA.
Black Money Law
In terms of the Black Money Act, a resident Indian shall be charged tax in respect of his/her total undisclosed foreign income and asset of the relevant year at the rate of 30% of such undisclosed income and asset. This shall also apply to a non-resident or RNOR if such person was resident in India in the relevant year in which undisclosed asset located outside India was acquired or the relevant year in which the foreign income was undisclosed.
Prohibition of Benami Property Transactions Act, 1988 (“PBT Act”)
PBT Act inter alia provides a comprehensive definition of what is to be considered a benami transaction and clearly setting out the transactions to be excluded from its definition. It establishes adjudicating authorities and appellate tribunals to provide a speedy and smooth redressal mechanism for offences punishable under the Act and gives the relevant authorities powers to attach, adjudicate and confiscate benami property.
2.4 What indirect taxes (sales taxes/VAT and customs & excise duties) apply to persons becoming established in India?
India introduced the Goods and Service Tax (“GST”) in 2017, as a destination-based tax levied on the supply of goods and services within India. GST subsumed most of the indirect taxes levied in India at that point, i.e. VAT, central sales tax, service tax, excise duty, etc. However, basic customs duty, central excise duty on alcohol for human consumption, and central excise/VAT on crude petroleum, high-speed diesel, petrol, natural gas, and aviation turbine fuel are still in effect.
Stamp duty, a non-recurring direct tax, is payable on the execution of an instrument evidencing the creation, transfer, limitation or extinguishment of rights/liabilities or recording rights/liabilities amongst the concerned parties. India has a federal tax system, thus instruments on which the centre and the states can collect stamp duty are specified in the Constitution of India, 1950. Further, stamp duty rates on the same type of instrument may differ from one state to another.
2.5 Are there any anti-avoidance taxation provisions that apply to the offshore arrangements of persons who have become established in India?
For the anti-avoidance provisions under the ITA, see question 2.6 below.
Further, the ITA has provisions dealing with transfer pricing and thin capitalisation that impact offshore arrangements.
Further, India has ratified the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“MLI”). The MLI will modify India’s tax treaties to curb revenue loss through treaty abuse and base erosion and profit shifting (“BEPS”) strategies by ensuring that profits are taxed where substantive economic activities generating the profits are carried out.
2.6 Is there any general anti-avoidance or anti-abuse rule to counteract tax advantages?
The General Anti-Avoidance Rule (“GAAR”) empowers tax authorities to deny tax benefits availed of by impermissible avoidance arrangements. An impermissible avoidance arrangement is an arrangement whose main purpose was to avail of tax benefits and which: (i) creates rights or obligations not ordinarily created between persons dealing at arm’s length; (ii) directly or indirectly results in the misuse or abuse of the provisions of the ITA; (iii) lacks or is deemed to lack commercial substance (as defined in the ITA); or (iv) is entered into or carried out by means or in a manner not ordinarily employed for bona fide purposes.
Further, where an arrangement is perceived to be an impermissible avoidance arrangement, it is presumed to be so unless the taxpayer proves otherwise. However, GAAR is only applicable on arrangements where the tax benefit exceeds INR 30 million in the relevant financial year.
GAAR gives the tax authorities wide powers such as the ability to deny tax benefits available to a taxpayer under DTAAs if the offshore arrangements of persons are mainly to avail of tax benefits.
2.7 Are there any arrangements in place in India for the disclosure of aggressive tax planning schemes?
Form 3CD (to be filed with the tax department in India) mandates the organisation to provide details of transactions designed to avoid taxes. If a taxpayer entered into an impermissible avoidance arrangement, details on the nature of the impermissible avoidance arrangement and amount of tax benefit in the previous financial year arising, in aggregate, to all the parties to the arrangement are to be disclosed in Form 3CD.
3.1 In India, what pre-entry estate, gift and/or wealth tax planning can be undertaken?
Since India does not levy estate tax or wealth tax, pre-entry planning is typically driven by foreign exchange considerations and not tax considerations. Foreign exchange driven planning is relevant in relation to assets generated outside India when the individual was a non-resident. Please note that the definition of a resident as per the Foreign Exchange and Management Act (“FEMA”) is different from the ITA. Under FEMA, an individual is an Indian resident if they spend more than 182 days in India in the previous year with the intention of residing in India for an indefinite period of time (see question 1.4 for the ITA test).
3.2 In India, what pre-entry income and capital gains tax planning can be undertaken?
In India, residents are liable to pay tax on their worldwide income. RNORs and non-residents are liable to pay tax in India only on their India-sourced income. Pre-entry planning in relation to non-resident Indian assets typically involves the setup of trusts or other vehicles in the overseas jurisdiction from an income deferral perspective. However, such structures would need to be vetted for any tax risks under the place of effective management (“POEM”) rule (elaborated in question 5.1), GAAR provisions (see questions 2.5 and 2.6), etc. Further, if any distributions are made by the relevant overseas entity, such distributions would be taxable in India at the applicable rates.
3.3 In India, can pre-entry planning be undertaken for any other taxes?
Customs duty and GST are the predominant indirect taxes payable by a business where the goods or services are to be consumed within India (see question 4.2). These taxes are difficult to plan for if the consumption is intended to be in India.
4.1 What liabilities are there to tax on the acquisition, holding or disposal of, or receipt of income from investments made by a non-resident in India?
Acquisition: Income and capital gains tax is generally not payable on acquisition of capital assets. However, in some of the following instances, tax may be payable on the acquisition of capital assets for investment:
(i) STT is payable on the purchase of shares listed on a recognised stock exchange.
(ii) Residents are mandated to withhold tax prior to paying the non-resident seller.
Holding: Tax liability during the holding period can arise in, inter alia, the following limited situations:
(i) When real estate has been rented out, tax is payable on the rent received.
(ii) If an individual or a Hindu undivided family owns more than two residential properties, the taxpayer is liable to pay tax on the estimated annual rent arising or deemed to arise to the owner if the property was let out, from any other than two properties which are lying vacant or periodically used.
Receipt of income from investments:
(i) Dividend: Dividend is liable to tax in the hands of the recipient shareholder. The company paying the dividend is liable to withhold tax on the payment of dividend to a resident or non-resident. A non-resident may avail beneficial tax treatment prescribed by the relevant DTAA for taxation of dividend.
(ii) Interest: Interest is liable to tax in the hands of the recipient. The payer of the interest is liable to withhold tax on payment of interest to a resident or non-resident. A non-resident may avail beneficial tax treatment prescribed by the relevant DTAA for taxation of interest.
(i) Capital gains tax is generally payable on the disposal of an asset at specified rates (see question 2.2). When a capital gain arises to a non-resident, he/she may avail of the beneficial treatment prescribed by the relevant DTAA.
(ii) STT is payable on sale of shares listed on a recognised stock exchange.
4.2 What taxes are there on the importation of assets into India, including excise taxes?
Customs duty and GST is levied by the central government on the import of goods into India.
4.3 Are there any particular tax issues in relation to the purchase of residential properties by non-residents?
If a residential property in India is purchased from a non-resident, the buyer (resident or non-resident) is required to withhold tax at the specified rates (unless a withholding tax order is obtained from the tax officer) and deposit it with the tax authorities under Section 195 of the ITA. A withholding tax of 1% is deductible on the purchase of residential property by a non-resident or a resident purchaser from a resident seller under Section 194IA of the ITA.
Stamp duty: The purchaser is usually mandated to pay a stamp duty of 5%–7% on the market value of the property, depending on the state in which the property is situated.
5.1 What is the test for a corporation to be taxable in India?
A company is liable to tax in India if the corporation is an Indian resident or has a source of income such as a business connection or PE in India.
Residential status: A company is a resident if: (i) it is incorporated or registered in India; or (ii) it has its POEM in that year in India. POEM under the ITA is defined as the place where the key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are in substance made. These provisions are applicable to companies having turnover/gross receipts of more than INR 500 million. The Central Board of Direct Taxes (“CBDT”) has issued guidelines that specify other factors to determine POEM.
Business profits of a foreign company arising from a business connection in India are liable to tax in India. The scope of business connection has been further expanded by the introduction of the concept of significant economic presence (“SEP”). SEP shall mean (a) transaction in respect of any goods, services or property carried out by a non-resident with any person in India including the provision of download of data or software in India, if the aggregate of payments arising from such transaction or transactions during the previous year exceeds INR 20 million, and (b) systematic and continuous soliciting of business activities or engaging in interaction with more than 300,000 users in India. The transactions or activities shall constitute SEP in India, whether or not: (i) the agreement for such transactions or activities is entered in India; (ii) the non-resident has a residence or place of business in India; or (iii) the non-resident renders services in India. Only so much of the income as is attributable to the transactions or activities referred to in clause (a) or clause (b) shall be deemed to accrue or arise in India on account of SEP.
As per the DTAAs, business profit is taxable in India when the foreign company has a PE. The concept of PE prevails over the concept of SEP in cases where the non-resident is from a jurisdiction with whom India has a DTAA, and if the PE concept is more beneficial than SEP (which is usually the case), the benefit can be claimed under the DTAA.
5.2 What are the main tax liabilities payable by a corporation which is subject to tax in India?
Corporations in India are subject to the following tax liabilities:
Income tax: Depending on whether the corporation is classified as a domestic company or foreign company, it shall be liable to pay income tax at the following rates:
(i) A domestic company is taxed at a flat rate of 30% of its total income. However, it may be taxed at 25% where its turnover or the gross receipt in the financial year 2020–21 does not exceed INR 4 billion. Lower rates in the range of 15% to 25% may be available for certain kinds of corporations if they fulfil the conditions prescribed under the ITA.
Surcharge is levied at 7% on the tax payable if the income exceeds INR 10 million but does not exceed INR 100 million, and at 12% on tax payable if the income exceeds INR 100 million.
(ii) Foreign company: A foreign company is taxed at a flat rate of 40%. Surcharge is levied at 2% on the amount of income tax if net income exceeds INR 10 million but does not exceed INR 100 million, and at 5% on the amount of income tax if net income exceeds INR 100 million.
Certain specified incomes like interest, dividend and royalty are taxable at specified rates, for example – dividend is taxable at the rate of 20% (plus applicable surcharge and cess), as stipulated in the ITA, unless there is a beneficial rate (if any) available under the DTAA.
(iii) Apart from the income tax and surcharge, health and education, cess is levied at 4% of income tax.
Minimum alternate tax (“MAT”): Domestic companies and foreign companies (subject to certain exceptions) are liable to pay MAT. If the ordinarily calculated tax payable is lower than 15% of the book profits of the company (method of calculation prescribed in the ITA), the company is liable to pay MAT equivalent to 15% of the book profits.
The difference between the ordinary tax liability and MAT liability is available as credit and can be carried forward for the succeeding 15 financial years.
5.3 How are branches of foreign corporations taxed in India?
Branches of foreign companies are taxed on income that is received in India, or which accrues or arises in India, at the rates applicable to foreign companies (see question 5.2).
Under GST, branches of a foreign corporation are treated as separate taxable entities and may require GST registration and compliance.
6.1 Has India entered into income tax and capital gains tax treaties and, if so, what is their impact?
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 BEPS discussions and is a signatory to the MLI, which was ratified on June 12, 2019. A total of 93 notified treaties are “covered tax agreements” modified by the MLI, which would also be relevant to evaluate while planning.
6.2 Do the income tax and capital gains tax treaties generally follow the OECD or another model?
Although Indian treaties are based on the OECD Model, they depart in significant ways and have a stronger focus towards source-based provisions.
6.3 Has India entered into estate and gift tax treaties and, if so, what is their impact?
India does not have estate and gift tax treaties with jurisdictions other than the UK. This treaty has limited impact, owing to the abolition of estate duty in India in 1985, although it is relied upon for the purposes of planning in the UK.
6.4 Do the estate or gift tax treaties generally follow the OECD or another model?
This is not applicable in India.
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 India?
In India, the law governing testamentary and intestate succession mainly depends on the nature of the property. Succession of immovable property is governed by the law of the country where the property is situated, i.e. lex situs. Succession to movable property is governed by the law of the country where the deceased was last domiciled, i.e. lex domicilii. If property situated in India is bequeathed under a foreign testamentary instrument, the Indian Succession Act, 1925 (“ISA”) allows the property to devolve as per the foreign instrument, if it is duly proved in the foreign country, by granting an ancillary probate. Although the testamentary instrument is proved in a foreign court, Indian law shall govern the devolution of immovable properties situated in India.
For the will to be treated as valid under Indian law, the will needs to be executed by the deceased/testator and attested by at least two witnesses who should be physically present at the time of signing. Further, the will should be signed by the deceased/testator while he/she is of sound mind, without coercion, fraud or undue influence from any external parties.
If the signing of the will is surrounded by suspicious circumstances, the validity of the will can be challenged. Some examples of suspicious circumstances may include the shaky or doubtful signature of the testator, the testator being of feeble mind, a disposition of property that appears manifestly unfair or involves the unjust exclusion of vulnerable heirs such as dependants, or the beneficiary benefitting from the will playing an active or leading part in the making of the will.
In terms of the ISA, a probate or letters of administration is required in the event that a will is executed in certain specific jurisdictions or pertains to immovable property situated in those specific jurisdictions.
Several private intermediary institutions such as banks are likely to insist on a probate or letters of administration or succession certificate before releasing funds or transmitting assets, if nominations are not complete.
7.2 Are there particular rules that apply to real estate held in India or elsewhere?
Real estate held in India is governed by Indian land laws and succession laws irrespective of the testator’s domicile (see question 7.1). If real estate situated in India is to be inherited by a non-resident, the transfer is also subject to FEMA.
7.3 What rules exist in India which restrict testamentary freedom?
A will-writer (testator/testatrix) has complete testamentary freedom to dispose their property as they deem fit through a will, with the following exceptions:
Forced heirship laws:
(i) Restriction on Muslims: Succession to property of Muslims in India is governed by their customary personal laws. Muslims are permitted to will away only one third of their estate and the balance shall devolve as per the customary forced heirship laws.
(ii) Restrictions on Goans: Goan residents are subject to community property rules and some forms of forced heirship.
(iii) India does not have any forced heirship laws applicable to Hindus (which includes 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.
Restrictions under certain state laws: State laws may have implications on succession of certain assets; for example, in the state of Maharashtra, the devolution of agricultural land is subject to the provisions of the Bombay Tenancy and Agricultural Lands Act, 1948, and devolution of tenancy rights is subject to the provisions of the Maharashtra Rent Control Act, 1999.
8.1 In India, can an individual create a power of attorney which continues to be effective after the individual has lost capacity?
Conceptually, a lasting power of attorney (“PoA”) enables a person to authorise a representative (or next of kin) 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. Such PoA is unlikely to be enforced by Indian courts, with the exception of advanced medical directives, which operate in a very limited context. This is precipitated by an absence of any specific law permitting the enforceability of such a PoA. The Indian Contract Act, 1872, which otherwise permits any person competent to contract to appoint an agent, provides that an agency (including a PoA) would automatically be terminated on the incapacitation of the principal or agent.
Advance directives (or advance medical directives or medical PoA) (“AMDs”) are instruments executed by a person (“Executor”) who is, at the time of execution, capable of making an informed decision, and by which such Executor authorises persons named therein to make decisions on their behalf in the context of medical treatment at a time when the Executor either becomes terminally ill and is undergoing prolonged medical treatment with no hope of recovery or does not have the mental or physical capacity to make decisions in this regard. The Indian Supreme Court has held that AMDs are valid in matters of grave medical illness and passive euthanasia, subject to compliance with a detailed procedure laid down by the court. The said judgement also lays down the process for implementing the AMDs when the Executor becomes terminally ill and is undergoing prolonged medical treatment with no hope of recovery. Some key aspects as highlighted by the Indian Supreme Court, in context of AMDs, are set out below:
(a) One of the requirement for an AMD to be treated as valid is that it should be signed by the Executor in the presence of two attesting witnesses, preferably independent, and attested before a notary or a Gazetted Officer.
(b) The witnesses and the notary or Gazetted Officer shall record their satisfaction that the AMD has been executed voluntarily and without any coercion or inducement or compulsion and with full understanding of all the relevant information and consequences.
(c) A copy of the AMD shall be handed over to the competent officer of the local government or the Municipal Corporation or Municipality or Panchayat, as the case may be.
(d) The Executor may also choose to incorporate their AMD as a part of the digital health records, if any.
(e) The process regarding the need to execute the AMD can be evaluated and initiated by the physician once the Executor loses decision-making capabilities.
(f) As part of the overall process, the hospital where the Executor is admitted is required to constitute primary and/or secondary medical board comprising of specified number of experts who shall form an opinion whether or not to certify carrying out the instructions of withdrawal or refusal of further medical treatment.
This being a recent development in the context of AMDs, the challenges and issues in its implementation are yet to be tested in the Indian courts.
Indian laws which deal with the concept of guardianship for mentally incapacitated persons are Mental Healthcare Act, 2017, National Trust for Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities Act of 1999 and Rights of Persons with Disabilities Act of 2016.
8.2 To what extent would such a power of attorney made by an individual in their home jurisdiction be effective to allow the attorney to deal with assets belonging to the individual which are located in India?
A PoA executed outside India if executed before, and authenticated by, Indian Consul or Vice-Consul shall be treated as valid in India and the same can be acted upon by the attorney to deal with the assets belonging to an individual in India. The PoA needs to be duly stamped within a prescribed time period after it is brought into India.
9.1 Are trusts recognised/permitted in India?
Yes, trusts are recognised and permitted in India. India broadly recognises two kinds of trusts, public trusts (charitable or religious) and private (family or investment) trusts. For this answer, only private trusts have been analysed.
Private trusts may be set up during a person’s lifetime or under their will, i.e. a testamentary trust. Property settled into a trust may be movable property or immovable property. Any settlement or transfer of immovable property requires the instrument of settlement or transfer to be in writing and registered with local authorities. It also attracts a higher stamp duty. A trust may be set up in the following forms:
(i) Revocable trust: Can be terminated by the settlor at any time during his/her lifetime.
(ii) Irrevocable trust: Cannot be terminated by the settlor and shall terminate when the object or term of the trust has been completed.
Trusts are further divided into the following categories:
(i) Discretionary trust: Trustees have complete discretion to decide the frequency and quantum of distribution of the trust fund to the beneficiaries.
(ii) Determinate trust: Trustees have little to no discretion in determining the entitlement of the beneficiaries. The entitlement is fixed by the settlor at the time of settlement of the trust.
Private trusts are a common vehicle for succession planning including for family businesses and may also be accompanied by other documents in the form of a family constitution or a family arrangement.
An irrevocable discretionary private trust may likely be an efficient vehicle for achieving the objective of asset protection and shielding family members from (future) inheritance tax implications.
Furthermore, the settlement of a trust is not valid if it is fraudulent – for example, if it was undertaken to defeat an existing liability. There may also be claw-backs under specific laws – for example, the Insolvency and Bankruptcy Code, 2016 (“IBC”) is a creditor-friendly law that provides for a prescribed look-back period within which “fraudulent transactions” or “undervalued transactions” may be set aside. Under IBC, personal guarantors are notified (for other individuals yet to be notified) under the ambit of IBC proceedings, which could also potentially result in the look-back period being applicable to assets transferred to a private trust.
9.2 How are trusts/settlors/beneficiaries taxed in India?
Trusts are treated as fiscally transparent entities in India. The following is a breakdown of a trust’s tax liability as per the ITA:
Taxability of revocable trust: As per the ITA, income arising to any person by virtue of revocable transfer of assets shall be taxed in the hands of the transferor/settlor.
Taxability of irrevocable trust:
(i) Tax liability of trusts: Settlement of assets or properties or money by the settlor in favour of the trust will not be liable to tax in the hands of the trust under the ITA if the trust is settled for the benefit of the relatives (defined under the ITA) of the settlor. Income of a trust is taxed in the hands of the trustee or beneficiary depending on the nature of the trust.
(ii) Tax liability of trustees and beneficiaries:
The ITA treats trustees as “representative assessees” in respect of the income earned or received on behalf or for the benefit of the beneficiaries. The income earned or received by the trustee in representative capacity shall be taxed in “like manner and to the same extent” as the tax would be leviable upon and recoverable from the person represented by him.
In case of a discretionary trust, wherein the beneficiaries’ shares are not specified, the income of the trust is taxable at the maximum marginal rate in the hands of the trustee.
In case of a specific trust, where the beneficiaries and their shares are specific, the assessment of the trustee (as a “representative assessee” of the beneficiaries) would have to be made in the same manner as that of the beneficiary whose interest is sought to be taxed in the hands of the trustee, and the amount of tax payable by the trustee would be the same as that payable by each beneficiary in respect of his/her beneficial interest, if he/she were assessed directly.
(iii) Tax liability of settlors: Settlement of assets or properties or money by the settlor in favour of the trust will not be liable to capital gains tax in the hands of the settlor under the ITA.
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 their income tax returns on an annual basis regarding the details of the foreign trust or entity, its taxable income/assets and any beneficial interest.
9.3 How are trusts affected by succession and forced heirship rules in India?
If a Muslim settles a lifetime trust, it would be important to ensure that the settlement is not considered a gift in anticipation of death, in which case it could still be subject to forced heirship rules.
9.4 Are private foundations recognised/permitted in India?
Private foundations are not recognised in India.
9.5 How are foundations/founders/beneficiaries taxed in India?
This is not applicable in India.
9.6 How are foundations affected by succession and forced heirship rules in India?
This is not applicable in India.
10.1 Are civil partnerships/same-sex marriages permitted/recognised in India?
Same-sex marriages are still not legally valid in India. It is pertinent to note that in the case of Navtej Singh Johar & Ors. v. Union of India (Writ petition (criminal) no. 76 of 2016), the Supreme Court of India decriminalised same-sex consensual relations. This decision did not deal with equal rights of same-sex couples in relation to marriage, divorce or property-related matters.
Civil partnerships are not expressly conferred legal status in India. However, the courts have recognised the rights of adults to live together consensually. The Supreme Court has held that where a man and woman are proved to have lived together as husband and wife, the law will presume, unless the contrary is clearly proved, that they were living together in consequence of a valid marriage. The law creates a presumption in favour of marriage and against concubinage when long-term cohabitation has taken place between the couple over an extended period of time. If the partners have cohabited together for a long time, the Indian Evidence Act, 1872 states that a presumption is created in favour of wedlock.
In the context of the Hindu Marriage Act, 1955 (applicable to Hindus, Buddhists, Sikhs and Jains), the Supreme Court has held a child born out of void or voidable marriage (which may cover civil partnerships) is conferred the status of a legitimate child and is entitled to claim a share in self-acquired properties of his/her parents.
In the context of Section 125 of the Code of Criminal Procedure (secular legislation applicable to all the religions), for grant of maintenance to woman, the Supreme Court held that where a man and a woman have cohabited for a long period of time, in the absence of legal necessities of a valid marriage, such a woman would be entitled to maintenance. Strict proof of marriage is not a pre-condition for grant of maintenance under Section 125 of the Code of Criminal Procedure.
Similarly, in terms of the provisions of the Protection of Women from Domestic Violence Act, 2005 (secular legislation applicable to all the religions), women who are, inter alia, married or in relationships in the nature of marriage are granted maintenance and/or the right to reside in a shared household. The courts have held that civil partnerships that fulfil certain parameters are relationships in the nature of marriage.
10.2 What matrimonial property regimes are permitted/recognised in India?
(i) Portuguese civil law as applicable in the state of Goa recognises the concept of community property wherein both spouses are considered joint owners of the property acquired during the marriage.
(ii) Muslim customary law recognises the concept of “mahr” or “dower”, which is a sum of money or property a wife is rightfully entitled to receive at the time of marriage and, in some cases, at the time of divorce.
(iii) Hindu law recognises the concept of “stridhan”, which is property that a woman receives at the time of her marriage or at any time during her marriage. Stridhan is recognised as a married woman’s absolute property. Hindu succession law also provides that, on the death of a female Hindu, any property inherited by her from parent(s) shall devolve on them if she does not have any children or grandchildren at the time of her death.
(iv) The Married Women’s Property Act, 1874 provides that a married woman’s earnings before and after her marriage are absolutely her property.
10.3 Are pre-/post-marital agreements/marriage contracts permitted/recognised in India?
Pre-/post-marital agreements/marriage contracts are not expressly recognised in India. Subject to the provisions of the personal and customary law applicable to the parties, courts may enforce a pre-/post-marital agreement/contract if it: (i) fulfils the essentials of a valid contract (as per the Indian Contract Act, 1872); and (ii) it is not opposed to public policy. For instance, agreements to make payments in the nature of a dowry is opposed to public policy and is 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. Goan law specifically provides for the registration and notarisation of prenuptial agreements. Similarly, under Muslim law, marriage is treated as a contract and not a sacrament.
10.4 What are the main principles which will apply in India in relation to financial provision on divorce?
Irrespective of the applicable personal laws, generally in a divorce, a spouse is entitled to maintenance and/or alimony. Jointly owned assets may be split up or realised and the proceeds may be split equally. Further, during the pendency of divorce proceedings, a spouse is also entitled to alimony pendente lite.
For instance, in terms of the Hindu Marriage Act, 1955 (applicable to Hindus, Buddhists, Jains and Sikhs), maintenance is granted to a party who has no independent income sufficient for his/her support and necessary expenses. This is a gender-neutral provision, where either the wife or the husband may claim maintenance. The prerequisite is that the applicant does not have independent income that is sufficient for his/her support during the pendency of the lis.
There is no formula that can be used for computation of the quantum of maintenance. Courts have considered the following criteria (illustrative list) to determine maintenance:
(i) reasonable needs of the wife and dependent children;
(ii) whether the applicant is educated and professionally qualified;
(iii) whether the applicant has any independent source of income;
(iv) whether the income is sufficient to enable her to maintain the same standard of living as she was accustomed to in her matrimonial home;
(v) whether the applicant was employed prior to her marriage;
(vi) whether she was working during the subsistence of the marriage;
(vii) whether the wife was required to sacrifice her employment opportunities for nurturing the family, child rearing, and looking after adult members of the family; and
(viii) reasonable costs of litigation for a non-working wife.
11. Immigration Issues
11.1 What restrictions or qualifications does India impose for entry into the country?
Every person who is not an Indian citizen must hold a valid national passport or any other internationally recognised travel document proving their nationality and identity bearing their photograph and a valid Indian visa granted by an authorised Indian representative abroad. The type of visa would depend on the purpose of visit, i.e. diplomatic, student, business, tourist, etc. Further, an Overseas Citizen of India (“OCI”) card may be issued to persons of Indian origin or relatives of Indian citizens, which permits them to enter India without a visa.
11.2 Does India have any investor and/or other special categories for entry?
Yes, India welcomes foreign nationals undertaking to invest more than INR 100 million within 18 months or INR 250 million within 36 months through the Foreign Direct Investment route. Such investment should generate employment for at least 20 Indian residents every financial year. Such foreign investors are granted a B-4 visa for the initial duration of 18 months or 36 months, as the case may be, and are eventually granted Permanent Residency Status (“PRS”) for a period of 10 years (extendable to another 10 years) with a multiple entry visa. There will be no requirement of registration with Foreigners Regional Registration Officers (“FRROs”)/Foreigners Registration Officers (“FROs”). This scheme will be applicable to only foreign investors fulfilling the abovementioned eligibility conditions, his/her spouse and dependents.
Any foreign national may avail of this scheme to enter India as an investor, provided he/she is not a Pakistani citizen or a third country national of Pakistani origin.
11.3 What are the requirements in India in order to qualify for nationality?
In terms of the provisions of the Citizenship Act, 1955, citizenship can be acquired in India by birth, descent, naturalisation or registration. Briefly, for persons born in India after 1950, citizenship by birth is automatically conferred if either parent is an Indian citizen.
It must be noted that dual citizenship is not permitted in India, meaning thereby 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, provided the citizenship of the other country is relinquished.
However, an Indian origin individual can apply to be recognised as an OCI. OCIs are treated on a par with non-resident Indian citizens in several respects.
11.4 Are there any taxation implications in obtaining nationality in India?
See question 1.5.
11.5 Are there any special tax/immigration/citizenship programmes designed to attract foreigners to become resident in India?
No, there are no such provisions.
12. Reporting Requirements/Privacy
12.1 What automatic exchange of information agreements has India entered into with other countries?
Apart from the MLI and the DTAAs, which contain clauses facilitating automatic exchange of information, and entering into Tax Information Exchange Agreements (“TIEA”) with 21 countries (approximately), India has taken the following steps to enable automatic exchange of information with various countries:
(i) India has ratified the Convention on Mutual Administrative Assistance on Tax Matters. Further to the ratification, India implemented and adopted the Common Reporting Standards and implemented it by making necessary legislative changes.
(ii) India has implemented Action 13 of the BEPS project by including provisions of country-by-country reporting (“CbC”) for large taxpayers. The CbC reporting requirement assists tax authorities to gain a better understanding of a multinational group’s activities, value drivers, profit creation and taxes paid in each of the jurisdictions in which it operates.
(iii) India has also signed the Inter-Governmental Agreement with the United States of America to implement the Foreign Account Tax Compliance Act (“FATCA”) and made relevant legislative changes to implement the same.
12.2 What reporting requirements are imposed by domestic law in India in respect of structures outside India with which a person in India is involved?
The following are the reporting requirements imposed by India with respect to structures outside India:
Disclosure Under the ITA Read With the Income Tax Rules, 1962
(i) Indirect transfer of Indian assets: Subject to the conditions specified in the ITA, transfer of assets situated outside India that derive substantial value from underlying assets in India is to be declared in accordance with the provisions of the ITA.
(ii) Filing of tax returns: A resident (see questions 1.4 and 5.1) when filing tax returns is liable to disclose foreign assets held by him/her in Schedule FA, which forms a part of the relevant income tax return form. Assets to be disclosed include foreign bank accounts, financial interest, immovable property held abroad, foreign accounts in which the individual has signing authority, offshore trusts and any other capital assets held by an Indian resident outside India.
Reporting of Significant Beneficial Owners in a Company
As per the Companies Act, 2013 read with the Companies (Significant Beneficial Owners) Rules, 2018 (“SBO Rules”), Indian companies are mandated to maintain a register containing information of significant beneficial owners (“SBO”), i.e. shareholders who are individuals and themselves or together with other persons (including companies, limited liability partnerships (“LLPs”), partnerships, trusts, etc.) hold 10% or more shares, voting rights, right to receive dividend in the Indian company or can exercise significant influence or control in the Indian company. Depending on the holding structure, SBO Rules prescribe various tests to determine the SBO depending on the nature of the holding entity. This reporting is required irrespective of whether the SBO or the entity through which it holds the shares of the reporting company is in India or overseas.
For example, if the rights or entitlements to qualify as an SBO are held by a body corporate, the individual holding the majority stake of that body corporate shall be disclosed as the SBO. If the rights or entitlements to qualify as an SBO are held by a trust, it will depend on the nature of the trust: if the trust is a revocable trust, the SBO shall be the settlor; if it is a discretionary trust, the trustees; or if it is a determinate trust, the beneficiaries.
Declaration in Respect of Beneficial Interest in Shares of the Company
In terms of the Companies Act, 2013, where the registered owner and beneficial owner (“BO”) of shares of a company are separate and the shares are held in the name of registered owner, the disclosure is, inter alia, required to be made of the particulars of the BO, the registered owner and nature of interest in the shares of the company held by the BO. This is relevant, inter alia, where the shares are held by the trust, in which case the shares are held in the name of the trustees (registered owner) and the beneficiaries are entitled to the beneficial interest in the shares. This declaration is required irrespective of whether the registered owner and/or BO is in India or overseas.
Disclosures Under the Prevention of Money Laundering Act
The Prevention of Money-laundering (Maintenance of Records) Rules, 2005 require banks and financial institutions to determine at the time of opening an account whether a client is acting on behalf of a BO and identify the BO and take all steps to verify the identity of the BO.
Where the client is a company, the BO is the natural person(s) who, whether acting alone or together, or through one or more juridical person, has a controlling ownership interest or who exercises control through other means. Controlling ownership interest means ownership of or entitlement to more than 25% of the shares or capital or profits of the company. Control shall include the right to appoint a majority of the directors or to control the management or policy decisions, including by virtue of their shareholding or management rights or shareholders’ agreements or voting agreements. Where the client is a trust, the identification of the BO(s) shall include identification of the author of the trust, the trustee, the beneficiaries with 15% or more interest in the trust and any other natural person exercising ultimate effective control over the trust through a chain of control or ownership. This reporting is required irrespective of whether the BO or the entity through which it holds the shares of the reporting company is in India or overseas.
12.3 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 India?
Yes, in the following instances set out below, details of persons controlling companies or trusts are mandated to be maintained in the public domain:
(i) The Indian Trust Act, 1882 read with the Registration Act, 1908 provides that the instrument creating a trust shall be registered if it is initially settled with immovable property. Details of the instrument are maintained in a register at the relevant Registrar’s office.
(ii) Indian companies shall maintain a register of SBOs and beneficial interest at the registered office of the company to be inspected by its members for a fee (see question 12.2).
(iii) The Ministry of Corporate Affairs maintains a database of companies and LLPs incorporated in India. Certain forms filed by the companies are available for public access – for example, the encumbrances created by the company on its assets, financial statements filed by the company, change in directors and auditor of the company. Certain details like partners of the LLP, directors of the company, date of incorporation and registered office of the LLP and the company are also available for public access.
This chapter is based on the legal regulatory regime in India as on 1st February 2023.
** Please note that FB 2023 (presented by the Finance Minister in the Parliament of India) is pending approval of the Parliament and is yet to receive the assent of the President of India for being enacted into the Finance Act, 2023.