Will PF corpus withdrawn when I’m within the US be taxed as earnings within the US?

I’m a senior government in a non-public restricted firm and am contemplating a transfer to our US places of work. The transfer is deliberate in January 2023 and the interval is indefinite, very probably for a number of years. My queries are:

1. Will I be an Indian tax resident for FY22-23 however non-resident from FY23-24 onwards. I shall be tax resident in US from 2023 onwards since they’ve a Jan to Dec tax 12 months.

If keep in India throughout FY 22-23 exceeds 182 days, then sure, for FY 22-23 you can be a tax resident in India. For FY 23-24, if the keep in India doesn’t exceed 182 days, then you can be a non-resident.

2. For Jan to Mar 2023, my US earnings shall be tax exempt in India or I’ll get credit score for taxes paid in US on account of tax treaties?

Since you can be a tax resident in India for FY 22-23, world earnings for the interval of 01 April 2022 to 31 March 2023, shall be taxable in India. However, credit score of taxes paid if any within the USA shall be accessible in India.

Please bear in mind to submit Form 67 for claiming overseas tax credit score in India, previous to submitting of your earnings tax return.

3. In the US, from 2023 onwards, will I get credit score for any earnings tax paid in India?

Based on Article 25 of the tax treaty between India and USA, the United States ought to permit its resident, as credit score, any earnings tax paid to India.

4. The scenario on capital good points and EPF appears to be far more difficult. I maintain substantial investments in shares and mutual funds (primarily fairness, some debt and a few balanced, however all in development plans) and have EPF corpus. 

From no matter I’ve learn plainly after I promote my shares or mutual funds, the capital good points are thought-about as US supply earnings beneath US tax legal guidelines and no credit score shall be accessible for capital good points tax paid in India. For fairness investments, it will end in me paying 10% (on good points above the non-taxable threshold) in India and 15% in US, totaling a whopping 25% capital good points tax. The solely exception is that if I pay equal to or greater than 10% of whole capital good points as tax, during which case the capital good points are handled as overseas supply earnings in US. However, because of the tax-free threshold of 1 lakh plus no tax on earnings as much as 2.5 lakhs, my efficient tax charge in India shall be decrease than 10% and I must pay double tax. For debt funds, the efficient tax could also be larger than 10% and therefore I’ll get rebate for taxes paid in India. Is this proper or am I lacking a chance to take credit score on all capital good points?

Based on Article 25 of the tax treaty between India and USA, the United States ought to permit its resident, as credit score, any earnings tax paid to India. The overseas tax credit score within the US on capital good points is predicated on their home tax legal guidelines and you need to seek the advice of a tax skilled/ skilled within the US. In India, capital good points are taxed based mostly on the kind of funding and holding interval of the asset.

In case of fairness fund, the place the holding interval is lower than 12 months, the tax charge is 15% + surcharge + cess. Where the holding interval is greater than 12 months, the tax charge is 10% + surcharge + cess on any good points above ₹100,000. Please notice that these tax charges are relevant, even when earnings is beneath most quantity not chargeable to tax i.e., ₹250,000.

In case of debt funds, the place the holding interval is lower than 36 months, the earnings tax is calculated on the relevant slab charge. In different instances, the tax charge is 20% + cess + surcharge (no matter the slab charge).

5.For the transfer I must resign from the Indian entity at which level I shall be eligible to withdraw my complete EPF corpus. I plan to take action and use it to fund bills of establishing within the US. In India this quantity shall be tax free, however will it’s thought-about as earnings in US and taxed there? Since my Indian employment will stop in late December 2022 or January 2023, I’ll obtain the quantity someday in 2023 bringing it beneath the purview of US tax for 2023.

For taxability within the US, please seek the advice of a tax skilled/ skilled within the US to compute the relevant taxes after customary deductions. In India, withdrawal of EPS is exempt from taxes after 5 years of steady service and no extra taxes are payable in India.

Queries answered by Neeraj Agarwala, Partner, Nangia Andersen India

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