Policyholder taxation For clients who will become Indian residents Capital redemption bonds

Please speak to your financial adviser for help in understanding this topic. 2 Front cover title goes here Quilter International 3

Contents

Determining your residency status in ����������������4

Taxation in India ���������������������������������������6

Taxation of capital redemption bonds in India ��������������8

Investing in a capital redemption bond as an Indian resident ������������������������������������9

Benefits of an offshore capital redemption bond ������������10 4 Policyholder taxation

Determining your residency status in India

Your liability to tax in India in a given tax year depends on your residency status. This is defined in the Act 1961 (ITA) and is based on the number of days you spend in India. The tax year runs from 1 April to 31 March.

Tax liability for residents – during the seven tax years prior to If you are resident in India you will the year under review, you were be liable to Indian tax on your present in India for 729 days or worldwide income. less, or Section 6 (1) of the ITA defines – you are a citizen of India, or person of ‘resident’ as: Indian origin, with Indian source income exceeding INR 1.5 million – you are present in India for 182 days during a tax year, and you are present or more during the financial year, or in India for 120 days or more but less – you are present in India for 60 (120 than 182 days in the tax year; or days if citizen of India, or person of – you are ‘deemed’ to be resident i.e. Indian origin, with Indian source you are a citizen of India and you income exceeding INR 1.5 million are not liable to tax in any other tax during a financial year) days or more jurisdiction (due to your domicile/ in the tax year and you have stayed in residence) and your income (other India for a total of 365 days or more than foreign sourced income) in the previous four financial years, or exceeds INR 1.5 million in that – you are ‘deemed resident’ if you are financial year. a citizen of India and you are not liable to tax in any other tax jurisdic- Tax liability for non-residents tion (due to your domicile/residence) If you do not meet the requirements and your income (other than foreign to be resident or ordinarily resident, sourced income) exceeds INR 1.5 you will be a non-resident for the tax million in the tax year. year being reviewed. Tax liability if you are resident but Non-residents in India are liable to not ordinarily resident Indian tax only on Indian source income, i.e. income or gains accrue, If you are resident but not ordinarily arise or are received (or deemed to resident you will be taxed only on: accrue, arise or be received) in India. – Indian-source income Non-residents may also be taxed: – income deemed to accrue or arise in India – on income deemed to accrue – income received in India or income or arise in India through a received outside India arising from business connection either a business controlled or a – through or from any asset or source profession established in India. of , or Section 6 (6) of the ITA defines ’not – through the transfer of a capital ordinarily resident’ as: asset situated in India (including a – you have been non-resident in India share in a company incorporated in nine out of the ten tax years in India) or a share/interest in a preceding the year under review, or company or entity incorporated outside India which derives (directly or indirectly) its value substantially from assets located in India. Quilter International 5

Applying the residence rules when you return to India In this example, it is assumed that you have been non-resident in India for the 10 tax years prior to your return to India during the tax year 1 April 2020 to 31 March 2021. It is also assumed that you do not meet the ‘deemed resident’ criteria described above.

Tax year 1/4/2020 – 31/3/2021 1/4/2021 – 31/3/2022 1/4/2022 – 31/3/2023 1/4/2023 – 31/3/2024

Days present in India 304 days 365 days 365 days 365 days during tax year Residence status Resident but will pass both the tests that Resident but will pass Resident and will no mean you will be treated as resident but not one of the tests that longer pass at least ordinarily resident mean you will be one of the tests treated as resident required to be treated but not ordinarily as resident but not resident ordinarily resident

Will gains from your No, provided you do not have the proceeds sent to India Yes, even if they’re not capital redemption bond sent to India be taxable in India? 6 Policyholder taxation

Taxation in India

Tax on income Income tax, the income tax surcharge and a health and education cess are payable on .

The income tax rates for the 2020/21 tax year are:

Taxable Income INR National income tax rates

₹1 – ₹250,000 0% ₹250,001 – ₹500,000 5% ₹500,001 – ₹1,000,000 20% ₹1,000,001 + 30%

– Individuals resident and aged Short-term capital gains arise when the 60-80: asset has been held for 36 months or no tax is payable until your taxable less. This excludes shares listed on the income is over ₹300,000. Indian Stock exchange, Unit Trust of India, zero coupon bonds and units in – Individuals resident and 80 years specified equity-oriented mutual funds, or over: no tax is payable until your for which the term is 12 months or less. taxable income is over ₹500,000. Shares (not listed on the Indian stock Furthermore, if your income does not exchange) of a company and exceed ₹500,000, a tax rebate of up immoveable property arise when the to ₹12,500 is available. asset has been held for 24 months or The Health and Education cess less. The health and education cess is – Long-term gains: Generally levied in addition to the income tax at long-term capital gains are taxed the rate of 4%. at 20% plus any surcharge and Tax on capital gains health and education cess. To counter the effect of inflation, the Tax is due when you dispose of cost of acquisition is indexed for a capital asset and make a gain. long-term capital gains. A capital redemption bond is a capital asset. – Where the asset has been held longer than the respective period – Short-term gains: These are for consideration as a short term subject to normal, progressive gain it is considered a long-term income tax rates (plus the capital gain. surcharge as applicable and health and education cess). An income tax surcharge is payable on the income tax rates, shown here:

Taxable Income INR Surcharge tax rates

₹1 – ₹5,000,000 0% ₹5,000,001 – ₹10,000,000 10% ₹10,000,001 – ₹20,000,000 15% ₹20,000,001 – ₹50,000,000 25% ₹50,000,001 + 37%

In addition, a health and education cess is payable. Quilter International 7

Tax on gifts

Gift tax is not payable by donors in India but certain recipients will pay income tax on gifts they receive: – with a fair market value in excess of ₹50,000; or – if the consideration paid for the asset is less than the fair market value by more than ₹50,000. Certain exemptions exist which are explained on page 8 of this guide. Estate was abolished in 1985 which means the estate of the deceased does not pay Inheritance Tax. 8 Policyholder taxation

Taxation of capital redemption bonds in India

For taxation purposes in India, Quilter International’s capital redemption bonds are classed as securities (a derivative within this definition) and taxable as capital assets. You will be liable to taxation on capital gains when they arise in accordance with Section 45 of the Income Tax Act. The tax payable will depend on whether gains are short-term or long-term capital gains.

Investment growth inside the the health and education cess. Gains before the assignment can be made capital redemption bond arising within 36 months will be taxable to a person resident in India. As the Quilter International is based in the at your marginal rate of income tax plus donor of the gift, you are not liable to Isle of Man and no tax is payable by any surcharge and the health and tax on the value being transferred and us on income and gains accumulating education cess. If a one off withdrawal if you give your bond to a family within the bond. Your bond will is requested, then the capital gain member who qualifies as a specified benefit from gross returns on your would be the difference between the relative, they’re not liable to tax on investment, except for any non- distributed amount and the adjusted receipt of the bond. Specified relatives recoverable withholding , for cost of acquisition. It is unclear how this include your spouse and children as example the tax retained at source on will apply to regular withdrawals. well as your parents, and any of your brothers and sisters. US share dividends. Taxation on death There is no Indian tax liability on any Your capital redemption bond does not When a gift is not exempt from tax, growth inside the bond, prior to pay a benefit when you die and as there the recipient will pay income tax on withdrawing capital. is no estate duty in India, no inheritance the value received if this is in excess tax is payable if you wish the bond to be of ₹50,000. Withdrawing money from the transferred to your beneficiaries. If you capital redemption bond The beneficiary of the gift will take leave your capital redemption bond in on the costs (indexed in the case of You can make withdrawals from the your will to one or more of your Long-term capital gains) and time bond in a number of ways: beneficiaries, tax is not payable on the period of the bond and pay capital – regular periodic withdrawals transfer to them. However, they will gains tax at the applicable rates when inherit the original acquisition cost and the bond is surrendered. – partial lump-sum withdrawals your period of ownership. This means The beneficiary is also exempt from tax – full surrender (which brings the that when they surrender the bond, on receipt if they received the bond: policy to an end) they must apply the premium amount you invested and add your period of – on the occasion of marriage – on the maturity date, if not ownership to theirs, in order to surrendered beforehand. calculate any short-term or long-term – by way of inheritance/testamentary disposition Gains arising from your capital capital gains. redemption bond, provided the funds Making a gift of your capital – in contemplation of the death held within the bond are for a personal redemption bond of the donor. investment and are not business assets, You can make a gift of your capital are taxable under the heading ‘Capital redemption bond by assigning it to Gains’. Gains arising after 36 months or another individual. The approval of more will be long-term capital gains, the Reserve Bank of required taxable at 20%, plus any surcharge and Quilter International 9

Investing in a capital redemption bond as an Indian resident

A Quilter International capital The Liberalised Remittance Scheme redemption bond is considered to be a will allow you, as a resident of India, to capital asset in India and you can make investments overseas up to an continue with your bond on becoming aggregate of US$250,000 in each tax an Indian resident. You might make year, including into a Quilter further investments from your International capital redemption bond. overseas accounts or from within India. Where payments are made from India As an investor, you can make payments a withholding tax of 5% may apply to from India into your bond provided you amounts above $9,529. comply with the relevant foreign exchange regulations and the rules of the Liberalised Remittance Scheme. Paying money into a capital redemption bond is an acceptable capital account transaction within the Foreign Exchange Management (permissable capital account transactions) Regulations 2000. 10 Policyholder taxation

Benefits of an offshore capital redemption bond

In addition to the possible tax benefits, offshore capital redemption bonds (also known as ‘offshore bonds’) can offer a number of benefits, particularly when compared to holding a range of different assets in an unwrapped investment portfolio:

– Amalgamating a variety of assets – Payments in and out of your into one product consolidates offshore bond can be made in reporting and avoids multiple multiple currencies. tax returns. – Investing in an offshore bond can – Avoiding the need to constantly be a valuable part of your update customer due diligence each succession planning. time a new investment is made. It – A beneficiary nomination enables only needs to be submitted once. you to retain the policy benefits – Offshore bond investments during your lifetime but probate is can save accountancy costs by avoided on death. reducing the amount of time and – Quilter International offers a range effort required. of trusts designed to cover a – Online access with one login makes number of common situations. managing the bond investments an – Trusts can be used to distribute easy and straightforward process. assets for complex family – All dealing requests are co-ordinated structures, without probate delays by Quilter International (or an agreed on death. Professional trustee third party) with one consistent services from Quilter International dealing process. Trust Company are available at a very competitive rate. – Because Quilter International can negotiate enhanced terms as an Specialist advice should be sought before institutional investor, dealing costs settlement of an offshore trust for the benefit of Indian resident beneficiaries from an Indian tax can be reduced. and regulatory perspective. Business unit name goes here 11

Please note, your investment may fall or rise in value and you may not get back what you put in. This document is based on Quilter International’s interpretation of law and tax practice as at February 2021. We believe this interpretation is correct, but cannot guarantee it. Tax relief and the tax treatment of investment assets may change in the future. www.quilterinternational.com Calls may be monitored and recorded for training purposes and to avoid misunderstandings.

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19233/INT21-0017/April 2021 (redemption version)