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Tax residency certificate is vital for claiming relief under DTAA

LiveMint logoLiveMint 24-04-2017 Sonu Iyer

What is the purpose of a tax residency certificate?


Typically, source of income lies where the services are performed, or where the asset, from which the income arises, is located. Residential status in India is determined based on the physical presence in India in the current financial year (FY) (1 April to 31 March) and preceding 10 FYs.

An individual qualifying as a Resident and Ordinarily Resident (ROR) is taxable on the global income in India, i.e. income earned in and/or outside India. Thus, there may be cases where the same income is being taxed in the resident country (i.e. India) as well as the source country. Similarly, income sourced in India may also be taxed in the resident country of the individual.

To avoid such double taxation, applicable relief may be claimed under the Double Taxation Avoidance Agreements (DTAA) between the countries where the income is taxed.

Under the India income-tax law, tax residency certificate is required from the resident country tax authorities to claim applicable relief under the DTAA.

Similarly if you require tax residency certificate for India, an application is required to be made in Form 10FA to the income-tax authorities. The certificate is issued in Form 10FB, on successful processing of the application.

I hold some mutual funds in India. I want to transfer these units to my mother. Can I do so? And what would be the tax implication of such a transfer for me and for her? I have been in Singapore for the past 2 years while my mother lives in Chennai.

—Vidya Thukral

Typically, fund houses do not allow transfer of units from one person to another. You may check with your fund house for the process of the same depending on the type of mutual fund.

Transfer of mutual funds from you to your mother will amount to a gift in the hands of your mother. There is no gift tax in India. However, income-tax is payable on any sum of money, movable property or immovable property received by an individual without consideration (i.e. without a quid pro quo), except gifts received from a relative. Under the income-tax law, the term ‘relative’ includes:

(i) Spouse

(ii) Brother or sister

(iii) Brother or sister of the spouse

(iv) Brother or sister of either of the parents

(v) Any lineal ascendant or descendant

(vi) Any lineal ascendant or descendant of the spouse

(vii) Spouse of the person referred to in clauses (ii) to (vi)

Therefore, a gift of mutual funds to your mother will not be subject to tax in India.

There will be tax payable by your mother on sale of units of mutual funds depending on the type of mutual funds and the period of holding of the same. The cost of acquisition for her for the purpose of calculation of capital gain will be the same as the price paid by you.

Units of equity oriented mutual funds which are held for more than 12 months are considered as long-term capital asset. Long-term capital gain on sale of equity-oriented mutual funds are exempt from tax in India. Short-term capital gain on the same are taxable at flat 15% (excluding surcharge and cess).

Units of non-equity (debt) oriented mutual funds which are held for more than 36 months are considered as long-term capital asset. Long-term capital gain on sale of debt mutual funds after giving benefit for indexation are taxable at flat 20% (excluding surcharge and cess).

Short-term capital gain on the same are taxable as per the slab rates applicable for the individual.

In case the total taxable income (i.e. gross income excluding the exempt income) exceeds the threshold for taxable income for a particular financial year, there is a requirement to file an Indian income-tax return. The threshold for financial year 2016-17 is Rs2.5 lakh.

Sonu Iyer is tax partner and people advisory services leader, EY India

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