Taxing incomes earned abroad

PARIZAD SIRWALLA | Updated on November 15, 2017 Published on January 14, 2012

I am residing in a house built in 1991. I built a second house in 2010 and let it out for rent. I took a loan for this second house from LIC housing finance. I am in the 30 per cent income tax bracket.

I will be paying around Rs 1, 20,000 towards interest alone on the loan for the FY 11-12. I am claiming interest payment as deduction from my income. My PF savings itself come to more than a lakh and hence I am not claiming principal repayment in my income. I am getting a rent of Rs 4,000 a month from the second house.

I am paying Rs 2,000 towards municipal tax for the second house. The net effect is around Rs 90,000 deduction in my taxable income.

One of my friends suggested that I can transfer the income from the second house to my wife and thus I can avoid this rental income in my income tax calculation. Is it possible? If so, how it should be done? What are the legal implications? Please guide. - Ramachandran R

Under the provisions of the Income tax Act, 1961 (“the Act”), the annual value of a property is assessable in the hands of the owner under the head “Income from house property. As you are the legal owner of the property, any income from such property would be taxable in your hands. If you transfer only the rental income of your second property to your wife, it would be diversion of your own income and would still continue to be taxed in your hands.

Further, according to Section 27 of the Act, the owner includes an individual who transfers any house property to his spouse for inadequate consideration. Therefore, in case, you transfer the legal ownership of the house property to your wife for inadequate consideration, you would be treated as “deemed owner” of the property and accordingly the rental income would continue to be taxable in your hands.

As a deemed owner, you will be entitled to claim the deduction towards municipal taxes, flat deduction of 30 per cent of net annual value and interest paid on housing loan during the concerned financial year (FY) in the same manner as you have been currently claiming said deductions against the rental income, which is taxable in your hands.

Whereas, if you transfer the ownership of the house property to your wife for adequate consideration (out of her own funds), then the rental income shall be taxable in your wife's hand. However, in such scenario, since you will ceased to be the owner of the property, deduction towards interest payment on housing loan may not be available.

I work for a software firm in Hyderabad. In 2009, I was deputed to the US. I worked in the US for two years and then came back to Hyderabad to continue to work for the same company. Taxes are deducted from my pay during the stay in US, and I filed IT returns in US for all applicable financial years.

I transferred my savings in the US using ICICI Money2India, to a savings account in India. I was told that as I am paying taxes in US, my savings are not taxed in India, and so I don't have pay tax in India again.

During those two years, I have a very small income in India, through bank deposits. How do I declare my income through savings from the US to Indian IT department? Do I have to declare at all? - Shankar

Taxability of income in India depends upon your tax residential status during the FY. Residential status is in turn determined by the physical presence of the individual in India during the FY and immediately preceding seven FYs. It is important to determine your residential status in India on year on year basis to ascertain the taxability of income in India. Just for understanding, there are three categories of residential status in India:

Non Resident (NR);

Not Ordinarily Resident (NOR); and

Ordinarily Resident (OR).

Depending upon your stay in India, in case you qualify as either NR or NOR during the FY, you shall be taxable in India only on India sourced income, which as mentioned by you is the interest on bank deposit in India. However, salary and other income earned and directly received in the United States of America (US) should not be taxable in India. Further, subsequent transfer of this savings from the US should not attract tax implications in India. Any interest that you earn on your savings bank in India is clearly taxable in India. You have to declare any income earned in India on investments, bank accounts, etc by filing the India tax return if the aggregate income in a FY exceeds the income threshold taxable limit.

However, if you qualify as OR in India in any of the FY, your global income should be taxable in India irrespective of source or place of receipt of such income. Accordingly, under the Act, the entire salary and other income, if any, earned in the US would be taxable in India.

(The author is Executive Director, Tax, KPMG)

(Mail your queries to > taxtalk@thehindu.co.in)

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