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Will PF corpus withdrawn when I’m in the US be taxed as income in the US?


I am a senior executive in a private limited company and am considering a move to our US offices. The move is planned in January 2023 and the period is indefinite, very likely for several years. My queries are:


1. Will I be an Indian tax resident for FY22-23 but non-resident from FY23-24 onwards. I will be tax resident in US from 2023 onwards since they have a Jan to Dec tax year.


If stay in India during FY 22-23 exceeds 182 days, then yes, for FY 22-23 you will be a tax resident in India. For FY 23-24, if the stay in India does not exceed 182 days, then you will be a non-resident.


2. For Jan to Mar 2023, my US income will be tax exempt in India or I will get credit for taxes paid in US due to tax treaties?


Since you will be a tax resident in India for FY 22-23, global income for the period of 01 April 2022 to 31 March 2023, will be taxable in India. However, credit of taxes paid if any in the USA will be available in India.

Please remember to submit Form 67 for claiming foreign tax credit in India, prior to filing of your income tax return.


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


Based on Article 25 of the tax treaty between India and USA, the United States should allow its resident, as credit, any income tax paid to India.


4. The situation on capital gains and EPF seems to be much more complicated. I hold substantial investments in shares and mutual funds (mainly equity, some debt and some balanced, but all in growth plans) and have EPF corpus. 

From whatever I have read it seems that when I sell my shares or mutual funds, the capital gains are considered as US source income under US tax laws and no credit will be available for capital gains tax paid in India. For equity investments, this will result in me paying 10% (on gains above the non-taxable threshold) in India and 15% in US, totaling a whopping 25% capital gains tax. The only exception is if I pay equal to or more than 10% of total capital gains as tax, in which case the capital gains are treated as foreign source income in US. However, due to the tax-free threshold of 1 lakh plus no tax on income up to 2.5 lakhs, my effective tax rate in India will be lower than 10% and I will have to pay double tax. For debt funds, the effective tax may be higher than 10% and hence I will get rebate for taxes paid in India. Is this right or am I missing an opportunity to take credit on all capital gains?


Based on Article 25 of the tax treaty between India and USA, the United States should allow its resident, as credit, any income tax paid to India. The foreign tax credit in the US on capital gains is based on their domestic tax laws and you should consult a tax expert/ professional in the US. In India, capital gains are taxed based on the type of investment and holding period of the asset.


In case of equity fund, where the holding period is less than 12 months, the tax rate is 15% + surcharge + cess. Where the holding period is more than 12 months, the tax rate is 10% + surcharge + cess on any gains above 100,000. Please note that these tax rates are applicable, even if income is below maximum amount not chargeable to tax i.e., 250,000.


In case of debt funds, where the holding period is less than 36 months, the income tax is calculated at the applicable slab rate. In other cases, the tax rate is 20% + cess + surcharge (irrespective of the slab rate).


5.For the move I will have to resign from the Indian entity at which point I will be eligible to withdraw my entire EPF corpus. I plan to do so and use it to fund expenses of setting up in the US. In India this amount will be tax free, but will it be considered as income in US and taxed there? Since my Indian employment will cease in late December 2022 or January 2023, I will receive the amount sometime in 2023 bringing it under the purview of US tax for 2023.


For taxability in the US, please consult a tax expert/ professional in the US to compute the applicable taxes after standard deductions. In India, withdrawal of EPS is exempt from taxes after five years of continuous service and no additional taxes are payable in India.


Queries answered by Neeraj Agarwala, Partner, Nangia Andersen India

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