As individuals have traveled and immigrated across India’s borders in search of greater opportunities, it has led to situations of non-resident Indians with high net worth. In the last few decades, individuals of high net worth have already been an increasing phenomenon in India. According to reports, the number of persons with an ultra-high net worth (a net worth of more than USD 30 million) will rise by nearly 63% in the next five years. Currently, India has 6,884 ultra-high-net-worth individuals out of the global number of 5,21,653.
As the number of high net-worth and ultra-high-net-worth individuals (especially non-resident ones) continues to steadily rise, there are increased concerns of estate planning and succession that need to be addressed. The taxation of income from the properties of non-resident Indians can be complex at times, and hence certain measures have to be kept in mind and planned in advance to ensure that there are no situations of distress at the time of succession.
Definition of ‘non-resident Indians’:
The Income Tax Act, 1961 defines ‘non-resident Indian’ (NRI) as being an individual who is a citizen of India or a person of Indian origin, who is not a resident. The Income Tax Act has also prescribed further rules to determine the residency status of an individual in a taxable period.
The residency rules are integral to taxation in India, as the incidence of income tax is determined according to an individual’s residency status. These residence rules determine which individuals can be classified as a resident of India vs. a non-resident. Full-time residents of India are taxed on their entire income (both Indian and global), while non-residents are only taxed on the income that accrues or arise in India. To determine which income arises or accrues in India, the source rule of taxation is applied.
There are three main types of residents for income tax determination: ordinary resident, not ordinarily resident, and non-resident Indian. Section 6 of the Income Tax Act lays down the residency rule, and individuals are determined as a resident, non-resident, or not ordinarily resident based on the following:
- Resident: An individual who lives in India for a period of 182 days or more in a taxable year. Or, an individual who has lived in India for a period of 60 days or more in a previous year and for a total period of 365 days or more in the four preceding years. In some cases, this has been changed to 120 days.
- Non-Resident: In general, an individual living in India for a period less than 182 days in a fiscal year will be a non-resident Indian.
- Not ordinarily resident: An individual who is a non-resident for 9 out of ten years preceding that taxable year or who has lived in India for a period less than 729 days for the preceding seven years, will be considered a not ordinarily resident.
For the purpose of succession and inheritance by legal heirs at the time of death, the concept of ‘domicile’ is also important. According to the Indian Succession Act, 1925 (‘The Succession Act’) the domicile of origin of a legitimate child is the country where the father may have been domiciled at the time of birth. Succession of property in India can sometimes be determined by the domicile of the party, which is where the current domicile of the person becomes important.
The domicile of origin is only changed if the individual acquires a new domicile by taking up ‘fixed habitation’ in a new country. The domicile of individual will usually remain unchanged from the origin until there is proper evidence that the individual has permanently settled outside the domicile of origin. Domicile is different from citizenship or residence as it is possible to continue to have domicile in a country where the individual is not currently a resident or a citizen.
Modes of Estate Planning:
At the time of death, if the individual dies intestate (i.e. without the making of a will), then their property will devolve to their legal heirs based on the relevant succession laws. Succession laws may vary greatly depending on the country; especially in the case of non-resident Indians whose legal heirs may have citizenship different to them. Hence, executing a will becomes an important measure to ensure the transfer of assets in the proportion desired by the individual at hand.
Besides executing a will, another method to ensure the easy transfer of assets to legal heirs is by setting up a trust. Private trusts can be set up during the lifetime of the individual, and they can set out the rules to be followed by the trustees in executing the objectives of the trust.
Both modes of estate planning are briefly explained below:
1. Executing wills:
In order to avoid intestate succession, an individual should prepare a will and testament laying down their wishes for the transfer of their assets to their specific legal heirs. Under the Succession Act, a will has been defined as “the legal declaration of the intention of the testator, with respect to their property, which they desire to be carried into effect after their death.”
In India, since personal laws (specific to the religion of an individual) are also present, beyond just the Succession Act, there could be other rules that are also applicable. General procedural aspects of drafting and executing a will are laid down in the Succession Act for the succession of immovable property; however, the succession of movable property shall be based on the law of the domicile country.
For making a will, an individual must be:
- A major
- Of sound mind
- And operating with free consent
A will may be made in favor of a person or a class of persons, for all individuals in India except for individuals that are Muslims. Bequests under a will cannot also be made to an unborn child under the Succession Act. Under Muslim law, a will may be made in favor of any individual that is capable of holding property including charities, and unborn children who will be born within 6 months.
Hindus and Christians under Indian law are allowed to dispose of via a will, any property that is capable of being disposed of by them. Under Muslim personal laws, there are specific rules as to legal heirship. They may only dispose of only one-third of their estate under a will and a testament.
Factors to keep in mind when making a will:
- The will that is being made should meet all factors required under the Indian Succession Act, 1925. The will should also be attested by at least two witnesses.
- The document should be made without coercion or undue influence and the same must be stated in the will.
- The will should properly delineate the properties that will be transferred.
- If any heirs of the individual are being disinherited, then the same must be specified in the will.
- A person must be named as the ‘executor’ of the will, who will execute the document on the passing of the individual.
- There is no requirement of registering wills, however, registering their wills would provide easier recourses for non-resident Indians.
2. Setting up trusts:
Trusts are a mechanism for maintaining assets in the case of complex or substantial asset delineation or complex situations of intergenerational wealth. Trusts can be both private or public. Private trusts are generally trusts set up for maintaining private wealth especially in the case of succession, while public trusts are meant to transfer assets to be used for charitable or public purposes.
A trust deed, with the required elements to form a trust must be documented in writing. The following conditions are essential for creating a valid trust:
- The person creating the trust has to make a clear and unequivocal declaration of intent to create a trust. This intention must be manifested in an “external expression” i.e., by means of writing, speaking, or through conduct.
- The object of the trust must be clearly defined.
- The beneficiaries of the trust must be clearly defined.
Specific considerations for NRIs: These are some special considerations that should be kept in mind in the case of estate planning for non-resident Indians:
1. Probates : A probate is a legal process by which the legitimacy of a will is established, and generally in this process the authority of the executor of the will and testament will also be established. A probate is mandatory in the case of Hindus, Buddhists, Sikhs and the will has been executed in special territories or regarding immovable property in special territories. An example of these territories are the cities of Mumbai, Chennai and Kolkata. Hence, for wills that are made outside these territories but include immovable property situated in them, the grant of a probate will be mandatory.
2. Foreign Wills and Foreign Probates: Foreign wills i.e., wills made outside of India but which may deal in immovable property within India, will be recognized in India if they are proved and deposited in a competent court with jurisdiction. Furthermore, The Indian Succession Act allows the grant of an ancillary probate, i.e., the regranting of the probate granted by a foreign court.
3. Trusts receiving foreign contributions: NRIs are allowed to hold foreign currency assets in India if they were acquired at the time the individual was an NRI or inherited from an individual who was an NRI. Such individuals can set up trusts to manage these assets, but theses trusts have to be approved under the Foreign Contributions Regulations Act, 1976.
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