How to account for your Indian investments while filing for US taxes?

How to account for your Indian investments while filing for US taxes?

by | Nov 29, 2018 | Investment & Income, Tax Planning

How to account for your Indian investments while filing for US taxes?

The sole intent of investments is to increase your net capital over a period of time. indian investments With the advent of newer methods, individuals now have more avenues to invest their money and their money works harder. However, amidst all this one must not forget about the US taxes. While there are various reasons for the same, coming under the radar of the IRS is something that you wouldn’t want to happen.

If you are an NRI and have investments in the home country India, some or all of it might be taxable. Thus, it is crucial to be cognizant of them and includes them in your tax returns as and when it is required. Here are some of the leading investments that you can make and how they are impacted by taxes.

Fixed Deposit

NRI’s can either have NRO or NRE accounts with leading Indian banks. For that matter, individuals can choose to invest their money with the help of Fixed Deposits. The basic structure of a Fixed Deposit is quite similar to other capital investments. There is an initial amount and that increases year on year due to interests. Thus, during its maturity, it is similar to other capital assets, where your investment grows over time.

The interest that you have earned on FD’s must be first converted into USD for the specific fiscal year and then reported in Form 1099-NT. You might still have to pay taxes to the IRS on your FD. This example would make things a bit clearer. Let us assume you have earned an interest of INR 15,000 on your FDs and the Indian Government levies a tax of 15%. Should your tax bracket in the USA be 30%, you will have to pay the additional 15% to the IRS under the DTAA or Direct Tax Avoidance Agreement between the USA and India.

Mutual Funds and Stocks

Mutual funds and stocks are quite popular among investor for their incredibly high returns. Thus, there would be no surprises if an NRI invests in these assets. However, just as a fixed deposit, you will have to pay taxes on the dividends earned on these mutual funds or stocks. Stocks and dividends come under the purview of the capital gain taxation system. For any gains in short term or less than a year, you will be charged 15% by the Indian Government. Similarly, for long term gains, if the amount exceeds INR 1,00,000 you will have to pay 10% taxes on the same. Should your investments exceed $10,000 you need to declare the same using Form 8938 and FBAR.

Real Estate

There is no denying the fact that Real Estate has always been one of the most lucrative investment opportunities. Whether you are looking for a place to settle down in the future or buying it for outright investments, real estate is a lucrative market. But should you pay taxes for any real estate that you hold in India? Well, yes and no. As long as you hold property in India, you need not to worry about any taxations. However, if you sell a property while staying in the USA, capital gains tax is applicable on the same. And you are liable to pay the appropriate taxes in the US.

Also, there aren’t any specific rules or regulations for rent. Thus, you can declare them under other income in your Tax Returns. Being aware of the different taxes on your financial assets is important to keep the IRS from digging deeper and finding any discrepancy with your tax filing.

Tax implications for your Indian Properties

Tax implications for your Indian Properties

by | Nov 29, 2018 | Blog, Investment & Income, Tax Planning, Tax Preparation

Tax implications for your Indian Properties

Tax implications for your Indian Properties.The real estate market has always been one of the most lucrative ones for investment. Tax implications for your indian properties.This applies to residents of India as well as non-resident Indians. However, there is a small aspect that not many are aware of or pay a lot of importance to, taxation.

If you are a currently in the United States of America and there is a property that you own in India, you are liable to pay taxes owing to certain terms and conditions. We will find out more about those situations or scenarios where you will end up paying taxes for those properties.

Resident status

Before we get to other details, it is important to know your residential status. A Non-Resident Indian is an individual who still holds an Indian Passport but has emigrated to another country on a temporary basis. This could either be related to work opportunities, education or residence. Any individual who spends more than 182 days outside the country would fit into the category.

Tax Implications

Taxes on your Indian property will only come into the picture if you earn more than INR 2,50,000 in India, excluding any sort of capital gains taxes. There are two major possibilities for earning money from your Indian property. You can either rent it or sell it to earn a profit.

Income from Rent

Any form of rental income exceeding INR 2,50,000 would be taxed like it is for a normal Indian resident.

  • The municipal tax is the first one to be deducted from your total rental income.
  • From the remaining, amount a standard deduction of 30% is allowed. It can also be used to offset any interest on a home loan that you pay for the property.
  • In the event, that you own more than one property but do not use it for residential purposes, you can claim it as self-occupied. In such cases, a notional rent is calculated on the property and taxes are applicable on the other properties.

Capital Gains

As the name suggests, this scenario would come into the picture if you sell a property and make some profit out of the transaction. There are two simple variables to such transactions. Firstly, the duration for which you held the property before selling it. And secondly, the cost variance in buying and selling the same.

  • If you hold on to a property for less than 2 years and decide to sell, it would come under the purview of short-term capital gains. In such cases, the gain is taxed as per the income tax slabs.
  • If you hold on to a property for at least 3 years before selling it, the same would qualify as a long-term capital gain and taxed accordingly. According to the current laws, it would stand at 20% and you would end up paying cess and surcharge on the top of it.

Certain Exemptions

NRIs can also benefit from certain tax exemptions that are in place.

  • Section 54

If you buy a property and decide to sell the same after 2 years from the purchase, and reinvest the total amount in buying another property within a span of 2 to 3 years, the profit that you make from the previous transaction is exempted.

  • Section 54EC

In the event that you hold on to a property for three years or more, it would qualify as a long-term capital tax. However, the gains on the transaction can be completely exempted if you decide to reinvest the same in bonds issued by NHAI or REC within 6 months of the sale.

These are some of the major tax implications that you need to be aware of, regarding your Indian properties.

Can an NRI continue his PPF?

Can an NRI continue his PPF?

by | Nov 29, 2018 | Blog, Investment & Income, Tax Planning, Tax Preparation

Can an NRI continue his PPF? 

NRI have common doubt on Can an NRI continue his PPF? but this is one of the most common forms of investments for Indians is PPF. It is secured, and you know the exact returns on its maturity. Its long-term perspective also works well with a lot of investors. PPF is majorly risk-free and is tax-free as well, which attracts a lot of investors. However, things might change a bit if you are an NRI and have invested in PPF.

Sometime back the Department of Economic Affairs passed a ruling which put NRI’s at a back step. According to the modifications to rules, anyone who invests in PPF as a resident of India and later moves out of the country, the account will be closed. The rule was set to come into effect the moment an individual was deemed as a non-resident Indian or lost their resident status.

This had left a lot of NRIs confused and worried about their investments. But there is some relief for them as of now. On 23rd of February 2018, the DEA released a memo which kept the previous decision on hold. In simple words, NRIs can continue to hold their PPF accounts until it reaches its maturity.

Yet one cannot invest any additional amount once their residential status changes. The PPF is a 15-year scheme which has provisions for extending the maturity date in the block of 5 years. However, it is not applicable to non-resident Indians.

Can NRIs open PPF Accounts?

The short answer is No. NRIs cannot open new accounts once their residential status has changed. Prior to 2003, NRIs were allowed to make additional contributions to their PPFs. Even then, it was only possible if your account was active prior to the change of residential status. An amendment in 2003 meant, that fresh contributions to PPF were not allowed anymore. However, they can hold to existing PPF contributions till their maturity.

Which Account Can NRIs use?

NRIs have the option to use either fund in their NRO or NRE account to pay for PPF. According to the PPF, a minimum investment of INR 500 must be made on a yearly basis to keep the account active. Failing to do so will make your account dormant. To revive the same, one must INR 500 for each year that you have missed along with a penalty of INR 50.

On Maturity

There are possibilities that you might still be an NRI when your PPF matures. In such cases, you would need to withdraw the remaining amount. As already mentioned, NRIs cannot extend their PPF duration. If the maturity date of your PPF is over and you haven’t withdrawn the amount, it would continue as ‘extended without contribution’.

What this means is that your PPF account will continue to earn interests, but you do not have to adhere to the minimum INR 500 rule anymore. The extension will take place in a chunk of 5 years for an unlimited number of times, as per the rule books.

Taxations

It is imperative that one takes a closer look at the taxation involved when they get into investments of any form. The case is no different when it comes to PPFs. If you are in India, the amount that you invest in PPF is tax deductible through Section 80C. And the returns that you receive on maturity is non-taxable as well, making them a worthy investment.

However, if you are an NRI and your PPF matures while you are in a different country, things pan out a bit differently. You most probably might have to declare the amount in your current residential country and pay appropriate taxes on the same.

All you need to know about PFIC reporting – Form 8621

All you need to know about PFIC reporting – Form 8621

by | Nov 29, 2018 | Blog, Tax Planning, Tax Preparation

All you need to know about PFIC reporting – Form 8621

For any US resident paying taxes and keeping a track of the same is as important a duty as any other. Being on the top of your taxes will not you to plan and sort things out well in advance. On the other hand, it prevents you from getting under the scrutiny of the IRS.Form 8621 One such important aspect of your tax filing is Form 8621. Being aware of what it is and whether or not you should include it in your returns can be quite helpful. Form 8621 comes into the picture if you are someone who has invested or owns an interest in a PFIC or Passive Foreign Investment Company.

Why Should You File?

If due to some reason you forgot or intentionally did not attach a Form 8621 along with your returns, you might be looking at one of the stiffest penalties the IRS has. Your return would come under the category of an incomplete tax return. This, in turn, means that the IRS has the authority to dig deeper and audit your returns until they are convinced.

What is PFIC?

The following is a brief description of what fits into the description of a PFIC.

If more than 75% income of an organization for a taxable year is passive, PFIC would be applicable. For example, if you have a company that invests largely into stocks, ETFs or securities it would come under the passive income category. However, if you have a consulting company they income would fall into the category of earned income.

If more than 50% of the average assets held by a company is utilized to produce passive income or held for the sole purpose of creating passive income, it would come under the purview of PFIC. Rental income for an instance is passive income.

Threshold

Irrespective of whether you are filing your taxes as single or married jointly, if your income from PFIC is more than $25,000, you must report the same. For example, if your PFIC’s make about $50,000 for a taxable year or you have 6 PFIC’s each earning $7000, you will have to include them in your tax filing. On the other hand, if your income from PFIC is about $18,000 for a taxable year, you might not have to declare it.

How To Report PFIC

The first step to reporting your PFIC’s is identifying how many you have in the first place. You can then use any exchange rate to calculate the income. Usually, people follow the data provided by the Department of the Treasury exchange rates or the rates published by the IRS.

Once you have identified the PFICs and used the exchange rates, you can determine if the income has breached the threshold values or not. If it has, then you would need to file the Form 8621 along with your tax returns.

To fill the form, you would need to enter the following information.

  • The name of the shareholder.
  • The address of the shareholder.
  • The year of filing for the shareholder.
  • The type of shareholder.
  • The name and the address of the PFIC.

The last step is a bit more challenging one. It requires you to write a summary of the information provided for Form 8621. The usual summary includes the different classes of shares, the date on which the shares were purchased for a taxable year, the number of shares that a shareholder holds by the end of the year, its valuation and the gains or losses made on them.

All you need to know about Capital Gains taxation and DTAA for your Indian and US investments

All you need to know about Capital Gains taxation and DTAA for your Indian and US investments

by | Nov 29, 2018 | capital gains taxation, DTAA, indian investments, tax deductions, Tax exemption, Tax Extension, Taxation, US investments

All you need to know about Capital Gains taxation and DTAA for your Indian and US investments

Capital Gains taxation To ensure that residents do not end up paying taxes at two different places, several countries get into a mutual agreement. The Double Taxation Avoidance Agreement is one such example. The United States of America and India have a rather comprehensive DTAA.

The DTAA is applicable to any individual, company, trust or partnership who have taxable income in both India and the USA. As per the agreement, the following taxes are levied by both countries.

  • The United States of America imposes the Federal taxes as per the Internal Revenue Code. It doesn’t include any accumulated earning taxes, social security taxes and personal holding taxes. The taxes are also applicable to insurance premiums paid to insurers in India as well as any private foundations.
  • India levies the Income Tax on the income that you a taxpayer earns in the country. It includes any surcharges but excludes undistributed income declared by some companies.

There are three major ways in which the DTAA can come into the picture.

Tax Credit

In the tax credit mechanism, your country of residence will offer you with tax credits for the taxes paid in the foreign country. This usually is divided as Tax Reserve method, Underlying Tax Credit method or Ordinary tax credit method.

Tax Exemption

In the tax exemption mechanism, the country of your residence exempts any income from the foreign country.

Tax Deduction

In this mechanism, the taxes that you pay in the country where your source of income is then deducted from your total global income and you need to pay taxes only on the residual amount.

Residential Status

Your residential status plays a crucial role in determining which country you should pay your taxes in or how to file your returns. According to Indian laws, if any individual stays for 182 days or more for a financial year, he/she is liable to pay taxes. Similarly, if they have stayed in the country for more than 365 days in the last 4 years and at least 60 days in the current taxable year, they need to pay taxes.

For the USA, the citizenship decides whether or not they should pay taxes. If a person is not a citizen, he/she is a non-resident alien. In such cases, either the substantial presence test or the green card test comes into the picture.

Immovable Property

If you have any immovable property such as real estate, the income generated on selling the same or other incomes from it such as forestry or agriculture will be taxed in the same State. This means, that your property and any earnings from it for a specific financial year will be taxed in India if it were done in India or the USA if it were present in the USA.

Income Through Interest

Any interest that you earn from financial institutions is subject to taxation in the country of residence. However, you might end up paying taxes in the country that you earn the interest owing to certain conditions. For example, if the interest that you earn does not exceed 15% of the gross interest amount that you earn.

Dividend Income

If are a resident of the USA and earn dividends from an Indian country, it will be taxed in the USA. However, it might be subject to taxation in India if it doesn’t exceed certain levels. These include:

  • 15% of the gross dividend amount if the individual own at least 10% of the stocks in a company.
  • 25% of the gross dividend in all other cases.

Being aware of the DTAA will help you avoid paying double taxes in both the countries.

All you need to know about Bank FATCA reporting as a US taxpayer

All you need to know about Bank FATCA reporting as a US taxpayer

by | Nov 27, 2018 | Audits, FATCA, FATCA reporting, Investment & Income, US Government

All you need to know about Bank FATCA reporting as a US taxpayer

Bank FATCA reporting as US Taxpayer.It should not come as a surprise that the US Government looks into a wider array of things for expats and not just the taxation. FATCA is one such avenue.  There are a lot of rumours and misinformation surrounding FATCA, so let’s break it down slowly.

What is It?

FATCA or Foreign Account Tax Compliance Act came into the law books in the year 2010. It made way for reporting of information related to payments towards foreign financial institutions or foreign entities in general. The whole intent of creating this Act was to make it easier for the IRS to keep a track of all the earnings that US citizens and business have from foreign investments or bank accounts.

One thing to keep in mind is that the IRS does not govern the FATCA. In fact, the Financial Crimes Enforcement Network under the US Treasury Department takes care of the same. Though, there is nothing holding them against sharing information at the time of need.

Whom does it Affect?

Knowing whether or not FATCA affects you is important. Simply because if it does, you would need to file everything very carefully and in a timely manner. The following individuals are impacted by FATCA.

  • US citizen or resident aliens (Green card holders) must be compliant with FATCA irrespective of where they stay.
  • US persons owning a business or have a majority stake in a business.
  • Any form of worldwide agreements.
  • US investment houses or banks that have interactions and dealings with foreign financial institutions.
  • Any foreign financial institution that deals with money.

Requirements to File FATCA

US residents who have foreign bank accounts or investments must file the FinCEN Form 114 if their investments meet the threshold amount. The FinCen Form 114 was previously known as the FBAR Form and some people still use the name. There aren’t any minimum age criteria for filing the Form 114.

The threshold amount for individuals stands at $10,000. If at any point in time during a financial year the investments breach the $10,000 mark, it must be reported with the help of FinCEN Form 114. Other forms of income such as interests or dividends must also be reported regularly to avoid any penalties or fines at a later stage.

What you Need to file FinCEN Form 114

In order to fill the FinCEN Form 114, you would need to have the following information handy.

  • Your name, social security details and address.
  • If there are any joint account holders, their name, social security number and address.
  • The type of bank account that you are holding (ex. Current, savings etc.). The type of Securities that you are holding (mutual funds or stocks) and any other type of investments that don’t come under the category of bank account or securities.
  • Details of your bank account.
  • The name and address of the bank with which you hold the account.
  • The bank account number.
  • The number of joint owners of the account.
  • The highest amount of money held in the account for the taxable year in question.

Are there any penalties?

The US Government levies some hefty penalties for withholding such information or failing to declare them during your tax filing. For non-willful violations, you might end up paying up to $10,000 for every year of not filing.

If you are found to be willfully violating the rules, you might face penalties up to $100,000 or 50% of the amount of money in your account at that point in time.