Author: Amit Roy

Taxation of Interest Income from NRE and FCNR Deposits for UK Residents

NRE and FCNR get tax credit even without paying taxes in India

  1. Double Taxation Avoidance Agreement (DTAA) provides for credit to be given for tax `spared` (i.e. not paid) in India under the provisions of Indian law set out in Article 24 (4)
  • This tax ‘spared’ relief is restricted to a period of 10 years from first exercised – Article 24 (5)
  • Credit for `tax spared’ is limited to the amount of tax which would otherwise have been paid under the terms of the agreement. As per UK India DTAA interest can be taxed maximum @ 15% Article 12 (2). Thus, relief restricted to 15%.
  • DTAA does not mention any certification requirements.
  • Income under sections of Indian Income Tax Act 1961 is mentioned in DTAA:
SectionsType of Income
10(4)Non-Resident (External) Account
10(15) (iv)FCNR Deposits
Other sectionsNot relevant for present scenario

Conclusion:

NRE and FCNR Deposits will get a Foreign Tax Credit Relief for tax which would have been paid in India if NRE/FCNR interest was taxable . This relief is restricted to 15% of gross interest.

Sources:

  1. Double Taxation Relief Manual DT9553
  2. International Manual INTM161270
  3. UK India DTAA Agreement – Synthesized text
  4. Source of Indian Income Tax text
  5. Institute of Chartered Accountants of India – Taxation of Non-residents 2018 version.

Bonus:

Prior to 1st April 2020 dividends distributed in India were subject to Dividend Distribution tax (DDT). Indian residents did not need to pay tax on dividends, but non-residents were at a disadvantage as they could not get credit for DDT.

Now DDT has been abolished, dividend will be taxable in the hands of the shareholders.

HMRC Worldwide Disclosure Facility – India

Step by Step Guide

Background

If you received a HMRC letter about your money or assets abroad and after having checked your tax affairs you find that you need to make a disclosure – you will  need to use this facility.

Step 1 – Where possible, contact HMRC. They may give you more information about the assets in question, which will help focus the review of tax affairs. However, there’s no guarantee they’ll share anything with you.

Step 2 – Send the certificate back to HMRC after ticking box 1

Step 3 – Register for the Digital Disclosure Service (DDS)

Step 4 – We have now 90 days to:

  • Gather the information to fill in the disclosure
  • Calculate the final liabilities including tax, duty, interest and penalties on a year by year basis.
  • Fill in the disclosure, using the unique disclosure reference number (DRN) given on notification
  • Gather information on maximum value of overseas assets you have in the past 5 years

Complete and true – Disclosure should be complete and full co-operation needs to be given to HMRC

Number of years– Taxpayer will also need to self-assess their own behaviour, based on this assessment, tax payer will be presented with the number of years disclosure needs to be made.

12 yearsNon-deliberate (see below bonus point 2)
up to 20 Dishonest behaviour

This will also have an effect on the quantum of penalty to be charged.

See Example of Offshore Penalty Calculation

Tax Calculation – We need to be aware of the effect of Double Taxation Agreements for this DTAA Digest and HS 263 will come handy.

Step 5 – It’s a condition of using this facility that we make an offer for the full amount of taxes, duties, interest and penalties owed.

We must make full payment in accordance with the disclosure on the same date that the disclosure is submitted.

We will get an acknowledgement from HMRC within 15 days of them getting the completed disclosure. They will aim to tell us of the intended course of action within 90 days of the acknowledgement.

Bonus:

  1. Penalty calculation – India is not on the list thus falls in the residual category 2.
  2. Time period for offshore assessments was changed in 2019. This override RTC Regulations. Earliest year for if reasonable care taken is 2013/14. If behavior careless earliest year is 2011/12. These time periods will change on 6th April 2021.

Source:

HMRC Guidance

HMRC-annual-average-exchange-rates-2011-to-2019Download

Further readings:

  1. Taxation of Interest Income from NRE / FCNR Deposits.
  2. Taxation of LIC Policy in UK.

Death and taxes

What to do when a tax payer dies ?

Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes — Benjamin Franklin, in a letter to Jean-Baptiste Le Roy, 1789

10th August 2020

Step 1: Use Government’s Tell Us Once (TUO) Service:
Via this service you inform a number of government organisations including HMRC about the death. Please note you will need a lot of information before you use this service. So check there website before calling – click here.


Step 2: Ascertain whether there was a Will?
Tax affairs of the deceased are handled by the Personal Representatives (PR).In case a Will is present, PRs are called Executors. In its absence they are called Administrators.

Step 3: Use HMRC Bereavement guide.

Step 4: Do PRs need to apply for Probate?
See basic guide here. Probate is not required all cases

Step 5: HMRC will send a tax return within 3 months with instructions. Submission back by post. No action needs to be taken unless the tax return arrives with instructions.

Sources:
1 – ICAEW Website
2 – Citizen Advice
3 – Gov.uk – After a death

18th September 2020

Two Tax returns received from HMRC:

Tax year 2019-20File in 90 days
Period 6th April 2020 till the date of death.File by 31st Oct 2021

Please note these tax returns do not have tax computation sections, HMRC will compute the tax payable and send the bill.

19th January 2021

Please note allowances like Married Couple’s allowance, Marriage Allowance and Blind Person’s Allowance can be transferred from the person who died to the surviving partner in the year of death. Source : Tax Adviser Magazine

Bonus:

Tax Adviser Magazine is a excellent source of information for Tax professional completely free.

Taxation of LIC policy in UK

How to compute tax on maturity of Life Insurance Corporation India insurance policy

Amounts received under LIC Insurance policies are exempt1 from tax in India thus are received without any tax deduction but in case it is received by an UK tax resident they will need to pay tax on any gain to UK tax authorities.

First thing to note is that gains is treated as income not as capital gains thus we do not get Annual CGT allowance.

Recently, my LIC life insurance policy matured. It was a Jeevan Surbhi policy with following payouts.

Income : Receipts

Details of premium paid is given below:

Time apportioned reductions

As I was non-resident for 8 years out of 20 years of insurance term. I could reduce the gain proportionately i.e. 66,540 divided by 20 (policy term) x 12 (years tax resident in UK) = INR 39,924

FX rate to convert foreign gain – method

Now we can convert this foreign gain to GBP using the monthly FX rates published by HMRC of the month in which gain received say September 2020 which is 98.65.

Gain in £405.

As this gain is lower than Personal savings allowance, thus no tax is payable.

Please note we will still need to disclose the gain even if not tax is payable.

Source:

  1. Institute of Chartered Accountants of India has produced a helpful guide for NRI taxation.
  2. HMRC Help sheet HS321