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Returning from USA? Reset your cost basis!

After our checklist for returning Indians, we thought it's time to write about something we do with a lot of our clients who are returning to India from the US - resetting your cost basis for shares and securities!


This is almost always a once in a lifetime opportunity and can save you a ton of tax. Don't miss out!

What's covered?


What benefit can I get from resetting my cost basis?

  • Let's say you purchased stock of Alphabet at a price of USD 2,000 per share while you were in the US.

  • You move back to India and the price of Alphabet share sky rockets to USD 3,000.

  • You could sell these shares at USD 3,000 and pay no capital gains tax.

How? The rest of the article covers this in detail!


If you want to continue holding Alphabet shares, you can simply repurchase the shares at the current cost. You would have reset your cost basis to USD 3,000 per share without incurring any tax.


Note: If you are a US citizen or Green Card holder, just stop reading. None of this would apply to you since you would be considered a US person even after leaving the US. Read on the compliances required for US citizens and Green card holders in India here.


Let's get into the provisions and we'll come back to this example at the end of this article.



Residential Status in India


Taxability of income in India depends upon the residential status of an individual which is categorized as:

  1. Resident and Ordinarily Resident (ROR)

  2. Resident Not Ordinary Resident (RNOR)

  3. Non-Resident (NR)

Residential Status chart - India
Simplified Residential Status chart

​To read about amendments made by Finance Act, 2020; click here.

Galactic Tip:

If you plan this right, you can usually get 2 years of RNOR status. We'll cover why this is important below in the article.



Taxability of Income in India

Scope of total income
Scope of total income

Notice that income earned outside India is not taxable for an NR or RNOR. This is important.



Substantial Presence Test in the US


You will be considered a United States resident for tax purposes if you meet the substantial presence test for the calendar year. To meet this test, you must be physically present in the United States (U.S.) on at least:

  1. 31 days during the current year, and

  2. 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:

  • All the days you were present in the current year, and

  • 1/3 of the days you were present in the first year before the current year, and

  • 1/6 of the days you were present in the second year before the current year.


If you don't meet the substantial presence test, you are a Non Resident Alien for US tax purposes.



Taxability of Capital Gains for Non Resident Aliens in the US


If your days of stay in the US exceed 183 days, US imposes a 30% tax on capital gains for Non Resident Aliens.


However, if your days of stay in the US do not exceed 183 days, the US does not tax capital gains for Non Resident Aliens.

Putting it all together


Here's a quick recap of what you need to know to make this strategy work:

  • India does not tax income outside India if you are an RNOR. Capital gains from US shares is considered income outside India.

  • US does not tax capital gains for non-resident aliens (subject to certain conditions).

There is a brief period that can be planned where you are an RNOR as per Indian tax laws and a Non Resident Alien as per US tax laws.


During this period, income from capital gains on sale of US shares is not taxable in India as well as the US.


Let's go back to our example now:

  • Let's say you purchased 1000 stock of Alphabet at a price of USD 2,000 per share while you were in the US.

  • You move back to India and the price of Alphabet share sky rockets to USD 3,000.

  • You sell these shares when you are a Non Resident Alien as per US tax laws and an RNOR as per Indian tax laws.

  • You sell all could sell these shares at USD 3,000 and pay no capital gains tax.

  • You have USD 1,000,000 in tax free income!

Now, if you want to continue holding Alphabet shares, you can simply repurchase these without any tax implications.

  • Purchase 1000 shares of Alphabet at USD 3,000 per share.

  • You eventually decide to sell these shares at a price of USD 3,500 per share when you are an ROR in India.

  • You pay tax at 20% on the capital gains amount (after indexation, if applicable). Read here how capital gains and tax is calculated on US stocks.

  • For the purpose of computing capital gains, cost of acquisition shall be USD 3,000 per share.

Notice how you paid no tax on the appreciation from USD 2,000 to USD 3,000.


What's the catch?


We've actually done this with numerous clients. Only thing you need to ensure is you are extremely precise with your planning. A small mistake might trigger a huge tax liability.


If you are returning to India from the US, feel free to contact us. Our team of experts will be happy to help!

Note:

The above article simplifies several aspects as far as Indian and US tax laws are concerned. Please do not take any decisions without consulting a tax professional. Our article has also ignored the effect of US state tax laws considering that each state taxes income differently. We would need to evaluate each case separately before providing a comprehensive tax saving plan.

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