In recent years, “fix and flip” has emerged as a lucrative real-estate investment strategy, particularly among high-net-worth individuals (HNIs) seeking to diversify their portfolios. By purchasing old/ dilapidated properties, renovating them, and then selling (a.k.a flipping) at a profit, investors are not only capitalizing on the potential of real estate but also securing a solid hedge against market volatility. With sought-after destinations like the UK, Switzerland, UAE and the US offering prime opportunities, the fix-and-flip market has become a preferred venue for those looking to strengthen their financial positions while simultaneously adding value to neighborhoods and cities.

Investment under liberalized remittance scheme

For Indian investors looking to tap into the “fix and flip” market abroad, it’s crucial to pay close attention to the country’s foreign exchange regulations. Under the Liberalized Remittance Scheme (LRS), individuals are allowed to remit up to $250,000 for overseas investments, but any transaction above the specified limit or involving certain high-risk countries requires approval from the Reserve Bank of India. To remit a higher amount, LRS limits of close family members maybe clubbed or the investment may be made through an Indian entity (involves careful planning).

It is important to note that “fix and flip” can be undertaken either through direct ownership of the property or through a special purpose vehicle (SPV) with limited liability. SPV-route is more prevalent as it acts as a pooling vehicle for multiple investors, avoids the risk of direct ownership and also reduces regulatory burdens. However, if there are only few owners then direct-ownership may be preferred as investing through SPV may entail regulatory hurdles (discussed further).

FEMA considerations for investing through SPV

As per FEMA Overseas Investment Rules, no person resident in India shall make investment in a foreign entity(including SPV) engaged in real estate activity. “Real estate activity” means buying and selling of real estate but does not include construction of residential or commercial premises for selling or leasing”. The term “construction” has not been defined in FEMA.  

As stated earlier, the business model of “fix and flip” is such that an SPV would be incorporated in the foreign country which will purchase the property, refurbish it and then sell it at a profit. Though, in hindsight, it may seem that the SPV is engaged in buying and selling of real estate, since refurbishment is being undertaken, a view maybe taken that the SPV is engaged in construction of residential premises and hence the investment  in SPV is permitted.

RBI requires the Indian invest or to disclose the activity code of the foreign entity in Form-FC as per NIC-2008(in Form-FC). The definition of “construction” as per NIC-2008 subsumes the activities of repairs and alterations. The commentary to the classification provides the following:

“This section (i.e. Construction) also includes the development of building projects for buildings or civil engineering works by bringing together financial, technical and physical means to realize the construction projects for later sale. If these activities are carried out not for later sale of the construction projects, but for their operation (e.g. renting of space in these buildings, manufacturing activities in these plants), the unit would not be classified here, but according to its operational activity, i.e. real estate, manufacturing etc.

It includes new work, repair, additions and alterations, the erection of pre-fabricated buildings or structures on the site and also construction of temporary nature. Included is the construction of entire dwellings, office buildings, stores and other public and utility buildings, farm buildings, etc.”

Therefore, the business model of fix and flip can be classified as construction activity as per FEMA. It is pertinent to note that, as per the above definition, the property so constructed/refurbished must be sold immediately by the SPV so as to not be qualified as a real estate activity. Some of the NIC codes which may fit the business activity of the foreign SPV are “4330-Building completion and finishing”; and “41002-Activitiesrelating to alteration, addition, repair, maintenance carried out on own-account basis or on a fee or contract basis”.

Planning investment strategy and exit route

Planning your exit route from the SPV is equally important as planning your investment strategy. Some of the key considerations include:

• Type of instrument- equity vs. debt
• Mode  of investment- Direct investment vs. investing through an Indian entity
• Satisfaction of minimum investment holding period under FEMA
• Mode of exit – third-party sale, share-buy back or dividend distribution
• Exit costs- brokerage and registration fees

In some cases, the AD-banker may take a different view from the above and still classify the activity as real estate activity considering the speculative nature of fix and flip. When Indian investors are setting up a SPV for their fix and flip ventures, it is important to explain the nature of the construction activity clearly to the AD-Banker at the time of submitting Form FC. This ensures that the transaction is properly classified and complies with the RBI’s regulations on foreign investments. Proper documentation and transparency in outlining the investment structure will help prevent any delays or complications in the approval process, allowing the investor to move forward with their international property dealings without issues.

Looking to invest in foreign real estate? Get expert guidance on navigating FEMA regulations and structuring your investment the right way. Contact us today to start your journey.

Register a Company in the USA from India: Legal, Financial & Tax Guide

Starting a business is an exciting journey, especially for those in India who want to expand their opportunities by registering a company in the USA. The United States is known for its robust economy, diverse market, and entrepreneurial spirit, making it an attractive destination for business owners worldwide. This blog will guide you through the important steps and information you need to know about the legal, financial, and tax aspects of setting up a business in the USA.

Different Types of Companies to Register Company in the USA from India

When you think about registering a company in the USA from India, it’s important to know the different types of business structures you can choose from. Each type has its own rules and benefits. Here are some common types of companies you can register:

1. Limited Liability Company (LLC)

An LLC is a popular choice for many new business owners. It protects your personal assets, which means if your business has debts, your personal belongings (like your house or car) are safe. An LLC (Limited Liability Company) also allows you to pay taxes on your personal income, which can save you money.

‍Benefits of an LLC

• Limited Liability Protection: Owners are not personally liable for business debts.
• Pass-Through Taxation: Profits are taxed only at the owner’s personal tax rate.
• Flexible Management Structure: Owners can manage the business directly or appoint managers.

2. C Corporation

A C Corporation is a more complex type of business. It is good for larger companies or those that want to raise money from investors. However, C Corporations have to pay taxes on their profits, and then shareholders (the people who own shares in the company) also pay taxes on any money they receive from the company. This is called double taxation.

Benefits of a C Corporation

• Unlimited Growth Potential: Can raise capital through the sale of stock.
• Limited Liability Protection: Shareholders are not personally liable for corporate debts.
• Perpetual Existence: The corporation continues to exist even if ownership changes.

3. S Corporation

An S Corporation is similar to a C Corporation, but it allows profits and losses to be passed directly to shareholders. This means that the company itself does not pay taxes, which can help avoid double taxation. However, there are limits on the number of shareholders and types of stock.

Benefits of an S Corporation

• Pass-Through Taxation: Avoids double taxation on corporate income.
• Limited Liability Protection: Shareholders are protected from personal liability.
• Attracts Investors: Can issue stock to raise capital.

4. Sole Proprietorship

This is the simplest type of business. If you start a sole proprietorship, you are the only owner and are responsible for all the business debts. While it is easy to set up, it does not protect your personal assets.

Benefits of a Sole Proprietorship

• Easy to Set Up: Minimal paperwork and cost to start.
• Complete Control: The owner makes all decisions.
• Tax Benefits: Business income is reported on the owner’s personal tax return.

5. Partnership

A partnership involves two or more people who share ownership of the business. Like a sole proprietorship, partners are personally responsible for the business debts. Partnerships can be a good way to combine skills and resources.

Benefits of a Partnership

• Shared Responsibility: Partners can share the workload and responsibilities.
• Combined Resources: Partners can pool their resources and skills.
• Pass-Through Taxation: Profits are taxed on the partners’ personal tax returns.

6. Non-Profit Organization

If you want to start a charity or a non-profit organization, this is the way to go. Non-profits can apply for tax-exempt status, which means they do not have to pay federal income tax. This allows them to use more of their money for their cause.

Benefits of a Non-Profit Organization

• Tax-Exempt Status: Can operate without paying federal income tax.
• Grants and Donations: Eligible for grants and tax-deductible donations.
• Limited Liability Protection: Protects personal assets from business liabilities.

Can You Register a Business in the USA from India?

Yes, you can register a​ business in the USA even if you are in India! The process is not too complicated, but it does require careful planning and following the rules. Foreigners can set up different types of businesses, like LLCs or corporations, depending on what they need.

Steps to Register a Business in the USA from India

1. Research the Market: Understand the market demand for your product or service in the USA.
2. Choose a Business Structure: Decide which type of business entity suits your needs.
3. Select a State for Registration: Choose a state that aligns with your business goals.
4. Appoint a Registered Agent: Designate someone to receive legal documents on behalf of your business.
5. Obtain an Employer Identification Number (EIN): Apply for an EIN for tax purposes.
6. Open a Business Bank Account: Set up a separate bank account for your business finances.
7. Register Your Business: File the necessary documents with the state agency.
8. Comply with Local Regulations: Ensure you meet all local licensing and permit requirements.

Requirements to Register Company in the USA from India

To successfully register a company in the USA from India, you need to meet several requirements:

1. Choose a Business Structure

First, decide what type of business you want to create. This choice will affect your taxes, liability, and how you run your business.

2. Select a State for Registration

Different states have different rules and taxes. Delaware is a popular choice because it has friendly laws for businesses and good tax benefits. However, think about where your customers are located when choosing a state.

3. Appoint a Registered Agent

A registered agent is someone who will receive legal documents for your business. This person or company must have a physical address in the state where you register your business.

4. Obtain an Employer Identification Number (EIN)

An EIN is like a Social Security number for your business. You need it for tax purposes and to open a business bank account. You can apply for an EIN online through the IRS website.

5. Open a Business Bank Account

It’s important to have a separate bank account for your business. This helps you keep track of your money and protects your personal assets.

6. Comply with Local Regulations

Depending on what type of business you are starting and where you are located, you may need to get specific licenses or permits. Make sure to research local rules to stay compliant.

7. Create an Operating Agreement

If you are forming an LLC, it is advisable to create an operating agreement. This document outlines the ownership and management structure of the LLC, as well as the rights and responsibilities of the members.

8. Register for State Taxes

Depending on your business activities, you may need to register for state taxes, such as sales tax or employment tax. Check with the state tax authority for specific requirements.

Register with State Agencies

After you have gathered all the necessary information, the next step is to register your business with the state agencies. Here’s what you typically need to do:

1. Filing Articles of Incorporation or Organization: This document tells the state basic information about your business, like its name, address, and structure.
2. Paying Registration Fees: Each state has its own fees for registering a business. Make sure you know how much it will cost.
3. Obtaining Necessary Licenses and Permits: Depending on your business type, you may need special licenses or permits to operate legally.
4. Setting Up a Virtual CFO: For Indian entrepreneurs, hiring a virtual CFO can help manage financial aspects and ensure compliance with U.S. tax laws. A virtual CFO can help you understand your finances better and make smart decisions.
5. Opening a Business Bank Account: Once your business is registered, open a business bank account to keep your personal and business finances separate.

Key Considerations Post Registering Your Business in the USA

After you have registered your company, there are several important things to think about to ensure your business runs smoothly:

1. Understanding Tax Obligations

As a business owner in the USA, you will need to pay federal and state taxes. It’s important to understand what taxes you are responsible for, including income tax, sales tax, and employment tax. Consulting with a tax professional who knows about international business can help you navigate these rules.

2. Setting Up Business Finances

Creating a good financial management system is essential for tracking your income and expenses. You can use accounting software or hire a virtual CFO to help you manage your business finances effectively.

3. Compliance with Employment Laws

If you plan to hire employees in the USA, you need to know the local labor laws. This includes rules about minimum wage, overtime pay, and employee benefits. Make sure you follow these laws to avoid problems.

4. Protecting Intellectual Property

If you have unique ideas, products, or branding, consider registering trademarks, copyrights, or patents to protect your intellectual property. This step is important for keeping your business safe from competitors​.

5. Understanding TDS (Tax Deducted at Source)

If your business involves payments to Indian residents, you need to be aware of TDS regulations. Understanding these rules will help you manage tax liabilities effectively and avoid penalties.

6. Establishing a Private Family Trust

For entrepreneurs looking to manage wealth and assets, setting up a private family trust can provide financial security and help with estate planning. This can be a smart way to protect your family’s future.

7. Building a Strong Online Presence

In today’s digital world, having a strong online presence is crucial for business success. Create a professional website, engage with customers on social media, and consider online marketing strategies to reach a wider audience.

8. Networking and Building Relationships

Networking is essential for business growth. Attend industry events, join business associations, and connect with other entrepreneurs to build valuable relationships that can help your business thrive.

9. Understanding Cross-Border Mergers

If you plan to expand your business internationally, understanding cross-border mergers can be beneficial. This involves merging with or acquiring companies in other countries, which can help you grow your market presence.

10. Staying Informed About Changes in Regulations

Business regulations can change frequently. Stay informed about any changes in laws or regulations that may affect your business operations. This will help you remain compliant and avoid potential legal issues.

Conclusion

Registering a company in the USA from India is a great opportunity for entrepreneurs who want to grow their businesses. By understanding the legal, financial, and tax implications, you can successfully navigate the process of setting up a business in the USA. Whether you choose to establish an LLC, C Corporation, or another type of business, careful planning is essential.

As you start this journey, consider seeking professional advice to ensure you follow all U.S. laws and regulations. With the right approach, you can successfully set up your business in the USA and take advantage of the many opportunities available in the American market.

Ready to take the first step in registering your company in the USA? Contact us for expert guidance tailored to your unique business needs. Get Started Now!

Unsure about the best business structure for your needs? Schedule a free consultation with our experienced advisors. Let us help you navigate the complexities of U.S. business registration. Book Your Free Consultation.

We understand that every business is unique. Contact us today for personalized solutions that cater to your specific needs in registering a company in the USA.

The trusts play a significant role in estate planning by providing benefits such as asset protection, flexible governance, continuity, and tax advantages. However, understanding the distinctions between different types of trusts is critical to align them with financial and estate planning objectives.  

This article explores the key differences between Grantor Trusts and Non-Grantor Trusts, delves into their tax treatment, and examines their role in estate planning. It also addresses the concepts of Revocable/ Irrevocable Trusts, Simple Trust and Foreign Trusts.  

1. Grantor Trust vs Non-Grantor Trust: A Brief Overview

When establishing a trust, a fundamental decision involves choosing between a Grantor Trust and a Non-Grantor Trust, each of which has distinct implications for administration, taxation, and overall utility in family arrangements.

Grantor Trust

A Grantor Trust is one where the creator of the trust (the “grantor” or “settlor”) retains certain powers or benefits, resulting in the IRS treating the trust’s income, deductions, and credits as those of the grantor. Consequently, the grantor reports the trust’s income on their personal tax return. According to the Internal Revenue Code (IRC), a trust is classified as a Grantor Trust if the grantor retains specific powers or benefits, such as:

1. Power to Revoke: The grantor has the ability to revoke the trust unilaterally.
2. Power to Control Beneficial Enjoyment: The grantor retains control over who benefits from the trust’s assets.
3. Administrative Powers: The grantor retains control over investments or the management of trust assets.

These retained powers result in the IRS treating the grantor as the trust’s owner for income

tax purposes.

Non-Grantor Trust

A Non-Grantor Trust, on the other hand, functions as a separate legal entity for tax purposes. The grantor relinquishes significant control or benefits, meaning the trust is responsible for its own income, tax return filings, and tax payments. In this case:

1. The trust files its own tax return and pays taxes at the trust’s tax rates.
2. The trust manages its own deductions and credits, operating independently of the grantor’s personal finances.

This distinction—between the grantor retaining powers in a Grantor Trust versus fully relinquishing them in a Non-Grantor Trust—is a crucial consideration when structuring a trust to meet specific family and financial goals.

2. Tax Treatment

Grantor Trust

A Grantor Trust is not treated as a separate taxable entity. Instead, its income, deductions, and credits flow through to the grantor’s personal tax return.

Advantages:

• Simplicity: Income is reported on the grantor’s personal return, eliminating the need for a separate trust tax filing.
• Potential Lower Tax Rates: The trust’s income is taxed at the grantor’s personal tax bracket, which may be lower than the trust’s compressed tax brackets.
• No Gift/ Capital Gain Tax: Because no real transfer has occurred, Grantor is not subject to gift/ capital gain tax.

Disadvantages:

• Tax Burden on the Grantor: The grantor is solely responsible for the trust’s income taxes, regardless of whether the income benefits the grantor personally.
• Decedent’s Estate: Even though the assets are transferred to the trust, they would still be included in the decedent’s estate upon death and may be subject to estate tax subject to other conditions.

Although grantor trusts can be established for various reasons, they are most commonly created to earmark an individual’s estate and allowing them to grow for the eventual benefit of their children or grandchildren. By retaining some level of control over the trust assets, a grantor can continue managing their wealth during their lifetime. However, it is important to note that the grantor will remain responsible for the annual income tax on the trust’s earnings.

Non Grantor Trust:

A Non Grantor Trust files its own tax return (Form 1041) and pays taxes on any undistributed income. Distributed income is taxed to beneficiaries.

Advantages:

• Income Shifting: Income distributed to beneficiaries may be taxed at lower individual tax rates. Instead of keeping the earnings within the trust to be taxed at the trust’s high tax rates, the trustee can elect to distribute those earnings to the beneficiaries at the end of the tax year.
• Separate Entity: The trusts operate independently, relieving the grantor of tax obligations related to the trust’s income.
• Estate Tax: Generally, the assets included as part of the non-grantor trust would not be considered as part of the estate of the Grantor. Hence, the same would not be subject to estate tax liability.

Disadvantages:

• Steep Tax Brackets: Trusts has the highest tax rates quickly due to compressed brackets.
• Increased Complexity: The Trusts require separate accounting and tax filings.
• Gift Tax: The contribution to the non grantor trust will be subject to gift tax upon funding the trust subject to other applicable conditions.

Non-grantor trusts are effective tools for reducing estate tax liability and removing income-earning assets from an individual’s estate. For instance, if an individual does not require income generated by rental real estate, transferring the rental real estate into a non-grantor trust for the benefit of their children or grandchildren can be advantageous for all parties.

Non-grantor trusts are also beneficial for individuals in higher tax brackets when their beneficiaries fall into lower tax brackets. By transferring income-producing assets to the trust for the beneficiaries’ benefit, the income generated can be distributed to the beneficiaries, who will then pay taxes on the earnings at a lower rate. It is important to note that establishing a non-grantor trust requires the individual to relinquish a certain degree of control. Once the trust is created, its management and future lie in the hands of the trustee.

3. Revocable vs Irrevocable Trusts: Does It Matter?

Revocable Trust:

A revocable trust allows the grantor to modify or revoke the trust during their lifetime. Typically, revocable trusts are classified as Grantor Trusts for tax purposes because the grantor retains significant control. These trusts are flexible and can adapt to changes in the grantor’s financial or personal circumstances.

Irrevocable Trust:

An irrevocable trust is one where the grantor relinquishes the ability to modify or revoke the trust without the consent of beneficiaries or through legal proceedings. Most irrevocable trusts are structured as Non Grantor Trusts, designed to remove assets from the grantor’s taxable estate. However, depending on the powers retained, an irrevocable trust can also be classified as a Grantor Trust for income tax purposes.

Implications:

• Revocable trusts are typically included in the grantor’s taxable estate.
• Properly structured irrevocable trusts can remove assets from the taxable estate,

offering potential estate tax benefits while also protecting assets.

4. Simple Trust vs Grantor Trust

A Simple Trust mandates the distribution of all income to beneficiaries annually and prohibits the distribution of principal. This structure contrasts with a Grantor Trust, which offers flexibility in accumulating or distributing income and principal.

Key Differences:

• Taxation: In a Simple Trust, income is taxed to beneficiaries upon distribution. In a Grantor Trust, income is taxed to the grantor.
• Flexibility: A Simple Trust is more restrictive, while a Grantor Trust allows for more discretionary management of assets.  

5. Domestic Trust vs Foreign Trusts

In U.S. tax law, trusts are classified as either domestic or foreign, and this classification significantly impacts their taxation and reporting obligations.

Definition

A trust is considered domestic if it satisfies both the “court test” and the “control test”:

1. Court Test: A U.S. court must have primary supervision over the administration of the trust.
2. Control Test: One or more U.S. persons must have the authority to control all substantial decisions of the trust.

If a trust fails to meet either of these tests, it is classified as a foreign trust.  

Taxation of Domestic Trusts:

Domestic trusts are subject to U.S. federal income tax on their worldwide income. The taxation depends on whether it is a Grantor Trust or Non Grantor Trust.

Taxation of Foreign Trusts:

The U.S. tax treatment of foreign trusts varies based on their classification:

∙Foreign Grantor Trusts:

– With U.S. Grantor: If a U.S. person transfers property to a foreign trust with U.S. beneficiaries, the trust is treated as a grantor trust, and the U.S. grantor is taxed on the trust’s income, regardless of distributions.  

– With Non-U.S. Grantor: Generally, the non-U.S. grantor is taxed only on the trust’s U.S.-source income. Distributions to U.S. beneficiaries may be subject to U.S. tax, depending on the nature of the distribution.  

∙Foreign Non-Grantor Trusts:

– The trust is taxed on its U.S.-source income and income effectively connected with a U.S. trade or business.

– U.S. beneficiaries are taxed on distributions, which may include accumulated income subject to the “throwback tax,” designed to mitigate tax deferral advantages

6. Balancing Pros and Cons

Selecting the appropriate type of trust is a decision that should be made with the assistance of a tax advisor. Beyond the question of whether to establish a grantor or non-grantor trust, there are several other important considerations to address, such as:

• Whether the trust should be revocable.
• The types of assets to be placed in the trust.
• The intended beneficiaries of the trust.
• Whether a portion of the trust should be allocated to charity.
• The duration for which the trust should remain active after the grantor’s passing.
• Whether the trust should be created during the grantor’s lifetime or upon their death.
• The ability to appoint a reliable trustee.
• The selection of an attorney to draft the trust documents.

Conclusion

Selecting the appropriate trust structure depends on the individual’s objectives—whether those involve tax efficiency, asset control, or estate planning. Understanding the differences between a Grantor Trust and a Non Grantor Trust ensures alignment with broader financial and personal goals.

For those seeking flexibility and control, a Grantor Trust may be the best option. However, for individuals prioritizing estate tax mitigation and independence, a Non Grantor Trust may offer more advantages. Consulting with estate planning and tax professionals is essential to navigate the complexities of trust structuring effectively.

Need help choosing the right trust for your estate planning? Consult a financial expert today to secure your assets and optimize tax benefits. Contact us now for expert guidance.

“Wealth is not just about making money; it’s about creating a lasting legacy.” Private family trusts epitomize this wisdom, offering a smart and structured way to manage family wealth, protect assets, and ensure smooth generational transitions. Let’s dive into the world of private family trusts, breaking down their essence, perks, and legal considerations.

What is a Private Family Trust?

Picture this: a family treasure chest managed by a custodian, who ensures every piece benefits the right people at the right time. That’s essentially a private family trust! It’s a legal framework where the settlor hands over assets to a trustee, who manages them for beneficiaries. What sets this arrangement apart? Its exclusivity—the beneficiaries are handpicked, making it a bespoke tool forestate planning and wealth management.

Creating a trust involves crafting a trust deed or embedding it within a will. Once established, the trust can acquire its PAN and operate a bank account. For trusts with immovable assets, registration isn’t optional; it’s a must.

Who’s Who in a Private Family Trust?

1. The Settlor:

The settlor is the architect of the trust. They define its purpose, structure, and rules. In some cases, they may even double as a trustee or beneficiary.

2. The Trustee:

The trustee is the captain of this ship, responsible for steering it in line with the trust deed. Trustees are the legal owners Trustees can be individuals or entities, but they must always prioritize the beneficiaries’ interests. Trustees owe a fiduciary duty to the beneficiaries, ensuring that the trust operates in their best interests. Trustees may be individuals who are resident in India. Pro-tip: Corporate trustees may be appointed where the family members maybe appointed to the board of directors (with majority members being resident individuals).

3. The Beneficiaries:

They are the stars of the show—the people (or entities) for whom the trust exists. From lineal descendants to corporate beneficiaries, the scope of  beneficiaries is wide.

The Many Perks of a Private Family Trust

Here’s why private family trusts are a cut above:

1. Asset Protection:

Trust assets are ring-fenced against potential liabilities or disputes involving the settlor, trustees, or beneficiaries. However, certain exceptions apply, such as assets transferred in anticipation of bankruptcy.

2. Estate Planning:

Trusts provide an efficient mechanism for transferring wealth across generations without probate delays or disputes.

3. Tax Efficiency:

Strategic structuring of trusts can help optimize tax liabilities, ensuring compliance while reducing the overall tax burden. Moreover, they prevent double taxation of income which is inherent in a corporate structure.

4. Privacy:

Unlike corporate records, which become public documents, trusts remain private, safeguarding sensitive family financial information. Lower regulatory compliance is an added benefit forholding assets through a private trust.

5. Flexible Governance:

Trustees can adapt to changing family circumstances or financial goals, ensuring that the trust remains relevant over time.

6. Wealth Preservation:

By controlling the distribution of assets, trusts minimize risks such as mismanagement or spend thrift behavior among beneficiaries.

Taxation of Private Family Trusts: No Surprises, Just Strategy

Tax rules for trusts may seem like a labyrinth, but here’s the map:

1. Revocable Trusts:

Income is treated as the settlor’s and taxed at their slab rates.

Asset transfers to the trust are disregarded for tax purposes.

2. Irrevocable Determinate Trusts:

Beneficiaries ‘shares are identifiable, and income is levied and recovered from the trustee atthe slab rates applicable to the beneficiaries. Where there are foreign beneficiaries, DTAA rates may apply.

Trustees may be taxed as representative assesses, but direct beneficiary assessments are possible.

3. Irrevocable Discretionary Trusts:

Trustees decide income distribution, but the taxman levies Maximum Marginal Rate (MMR).

4. Capital Gains Tax:

Transferring assets to an irrevocable trust? No tax, thanks to Section 47 of the Income TaxAct.

Selling assets from the trust? Tax applies based on cost and holding period.

Trusts vs. Wills

“Why put off until tomorrow what you can secure today?” Trusts embody this spirit. Unlike wills, which kick in posthumously, trusts can operate during your lifetime. Here’s why trusts often outshine wills:

1. Trusts allow for continuous management and adaptability to changing family circumstances such as education, marriage, starting business ventures etc. which is not possible through a will. Wills are static documents that reflect the testator’s wishes at the time of drafting.

2.  A will only takes effect after the death of the testator and requires probate to be executed. During the probate process, the will may be challenged. Trusts help avoid potential disputes as they do not undergo probate.

3. Since trustee is the legal owner of the trust property, trusts can act as safeguard against estate duties for future generations who are domiciled in foreign countries which levy estate or inheritance taxes.

That said, wills have their place—especially for immovable property, where they score on lower stamp duty.

Legal Consideration: What You Need to Know

Establishing a private family trust isn’t rocket science, but it requires attention to detail. Here’s the checklist:

1. The Trust Deed: The trust deed serves as the foundational document, clearly outlining the trust’s purpose, the assets it holds, the distribution mechanism, eligibility of beneficiaries, and the governance structure. It is essential for the deed to be comprehensive and detailed to prevent any ambiguities or potential disputes in the future.

2. Stamp Duty: Don’t forget— transfer of assets to trust will be subject to stamp duty as per relevant state laws.

3. Registration: Mandatory for trusts with immovable assets.

4. FEMA Compliance: If foreign assets or non-resident beneficiaries are involved, FEMA regulations apply. Indian Trusts with non-resident beneficiaries may be permitted by the apex bank subject to certain conditions. Indian resident individuals are permitted to settle foreign trusts within the limits sanctioned under the Liberalized Remittance Scheme(LRS).

5. Dispute Resolution: Indian Trusts Act,1882 provides for settlement of disputes only through court procedure.

6. Periodic Reviews: Trusts aren’t set-and-forget. Regular reviews keep them relevant.

7. Longevity Strategies: If the rule against perpetuity applies (refer Transfer of Property Act), consider “decanting” to anew trust for continuity with same terms and conditions.

Conclusion

“Leave a legacy, not amess.” Private family trusts are the epitome of this ethos, blendingforesight, flexibility, and financial savvy. Whether you’re safeguardingwealth, optimizing taxes, or planning your family’s future, a trust is morethan a legal structure—it’s a legacy in action. Done right, it’ll stand thetest of time, ensuring your family’s treasure chest stays full and secure for generations to come. Ready to secure your family’s future? Take the first step toward building a private family trust today and ensure your legacy stands the test of time. Contact our experts to get started.

Withholding Tax on Sale of Property in India: Everything You Need to Know

Withholding tax in India, commonly referred to as Tax Deducted at Source (TDS), is a mechanism under the Indian Income Tax Act, 1961, where a specified amount is deducted from payments such as salaries, interest, rent, professional fees, dividends, etc., by the payer at the time of making the payment. This deducted tax is then deposited with the government on behalf of the payee. TDS enables tracking of personal and corporate transactions and allows steady stream of revenue to the Government.

‍

Tax on Sale of Immovable Property by NRIs

When a non-resident sells property in India, the transaction attracts tax on the capital gains made by the non-resident. Capital gain refers to the gains arising from the sale of a capital asset, such as property, stocks, bonds, or mutual funds. It is the difference between the sale price of the asset and its purchase price (or cost of acquisition).

Capital gains tax on the sale of property in India by a non-resident depends on the holding period:

• Long-Term Capital Gains (LTCG): If the property is held for more than two years, it results in long-term capital gains taxed at 12.5%.
• Short-Term Capital Gains (STCG): If the holding period is two years or less, the gains are treated as short-term capital gains and taxed at the applicable income tax slab rate, typically 30%for non-residents.

Exemptions and Deductions Available for NRIs

If the NRI has earned long-term capital gains on the sale of property, the following exemptions are available, subject to the fulfillment of applicable conditions:

1. The entire gain shall be exempt if an equal amount is invested in the purchase of another property.
2. The entire gain shall be exempt if the entire sales proceeds are invested in bonds of the National Highways Authority of India (NHAI) or Rural Electrification Corporation (REC) within six months from the date of sale.
3. If the gain is on the sale of a property other than residential property, the NRI can avail of exemption (full or pro-rata) by investing the sale proceeds in a residential property in India.

No exemption is available against short term capital gains in the above scenarios.

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Execution of sale through attorney

A non-resident who cannot be physically present in India to handle the legal and administrative procedures for the sale of property generally provides a Power of Attorney (POA). The POA enables a representative to act on their behalf, ensuring compliance with local laws, execution of sale documents, representation before authorities, and completion of formalities such as registration and compliance. This streamlines the process while safeguarding their interests.

It is important to note that the role of the POA holder is limited to executing the transaction for which they are authorized. The responsibility for paying income tax on the capital gains from the sale of the property rests solely with the non-resident seller.

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Withholding Tax on Purchase of Immovable Property

When purchasing immovable property from a non-resident in India, the buyer is required to deduct TDS on the entire sale consideration paid to the non-resident. This is irrespective of whether the non-resident has capital gains on the sale of the property or not. The rate of TDS may extend up to 39% depending on the gains realized.

The fact that the TDS is deducted on the sale consideration results in significant amounts being deducted as TDS at the time of remittance by the buyer to the non-resident.

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Income Tax on Sale of Property Received as Gift or Inheritance

It is common for NRIs to sell property in India which was received by way of a gift from their relative (parents, spouse, etc.) or by way of inheritance. Sale of such property would also attract capital gains tax in India. However, the following points need to be noted:

1. Cost of Acquisition: The cost of acquisition of the property will be the cost at which it was originally acquired by the donor. If the donor inherited or received the property as a gift, the original cost of acquisition of the person who first acquired the property will be considered.
2.  Holding Period: The period for which the property was held by the donor is also included to determine whether the gain is short-term or long-term. If the total holding period exceeds 24 months, the capital gain is treated as long-term; otherwise, it is considered short-term.

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Reduction of TDS rate through Lower Tax Deduction Certificate(LTC)

A Lower Tax Deduction Certificate (LTC) is issued by the Income Tax Department, confirming either a lower rate of TDS compared to the rate specified under the law or a NIL rate of TDS, depending upon the facts and circumstances of each case.

An NRI may apply for LTC when the actual tax payable is expected to be lower than the TDS on sale consideration.

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Application Process:

To request a certificate for a lower tax deduction, an NRI must submit an application in Form No. 13 electronically. The list of documents required for LTC depends on the transaction and other facts of the non-resident and property. However, the following is a standard list of documents and information that are generally required for the certificate:

• Income Tax Login Details of the non-resident
• Access to the TRACES Portal(for filing Form 13 online)
• Agreement to sell/ Memorandum of sale entered with the Buyer for the sale of the property
• TDS Account Number (TAN) of the Buyer
• Copy of Passport of the NRI
• Property acquisition and purchase-related documents

The certificate is valid from the date of issuance till the end of the financial year for which it has been applied. However, if the Assessing Officer cancels the certificate before its expiry, it becomes invalid. It is essential to note that the certificate is only valid for the specified period in the previous year and cannot be carried forward to future years.

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Conclusion

Understanding the nuances of withholding tax on the sale of property is crucial for both NRIs and buyers. Proper compliance with TDS requirements, tax deduction rules, and exemption provisions can significantly optimize tax liabilities while ensuring adherence to the Indian Income Tax Act Indian Income Tax Act. For NRIs, applying for a Lower Tax Deduction Certificate can help mitigate the financial burden of high TDS rates, providing relief and smoother transactions.

Need expert guidance on navigating withholding tax regulations? Contact us today for tailored advice and support!