Returning NRIs, Foreign Property, and Overseas Loans

A Legal and Strategic Guide under FEMA, Income Tax, and RBI Regulations

Introduction: The Quiet Complexity of Coming Home

For thousands of Non-Resident Indians (NRIs), the decision to return to India—whether prompted by the global pandemic, a career shift, or family priorities—brings not just emotional and cultural realignment, but also a complex set of financial and legal transitions.

Among the most common challenges faced by returning NRIs is this:

“I bought property abroad using a loan. Can I keep it after returning to India? Can I continue to pay the EMIs from India or from the rent earned there? What are the tax, FEMA, and RBI implications?”

These questions are not merely academic. They touch upon a confluence of laws—FEMA regulations, Income Tax Act provisions, and RBI circulars—each of which treats foreign income, asset holding, and loan repayment differently depending on a person's residential status.

Many returnees are unaware that residential status under FEMA and residential status under the Income Tax Act are determined differently, and often become misaligned. Others continue remitting funds for EMI payments without complying with India’s foreign exchange rules, or fail to disclose foreign rental income and property in their Indian tax returns—exposing themselves to avoidable legal and financial risks.

This comprehensive guide is written to address every possible scenario faced by a returning NRI who still holds property and obligations abroad. It offers clear, practical answers backed by:

• The letter of the law,

• Judicial and regulatory interpretations,

• Reporting requirements, and

• Strategic compliance choices.

Whether you plan to retain or sell the overseas property, continue loan repayments, or reinvest the proceeds in India, this guide provides a reliable legal and financial roadmap.

Let us begin by understanding the foundational principle: the dual definitions of residency under Indian law—and why they matter.

Dual Residency Status: Income Tax Act versus FEMA

Understanding the difference in residential classification under the Income Tax Act and FEMA is foundational.

A. Under the Income Tax Act, 1961

This determines whether foreign income and assets are taxable and reportable in India.

• Resident and Ordinarily Resident (ROR):

  • Global income, including rental income and capital gains from foreign property, is taxable in India

  • Disclosure of all foreign assets in Schedule FA is mandatory

  • Eligible for Foreign Tax Credit (FTC) under Double Taxation Avoidance Agreements (DTAAs) through Form 67

• Resident but Not Ordinarily Resident (RNOR) / Non-Resident (NR):

  • Only income sourced or received in India is taxable

  • Foreign income and assets are generally not taxable or reportable

Most NRIs who returned during or after the COVID period and stayed in India for more than 730 days over the preceding seven years now qualify as ROR.

B. Under FEMA, 1999

This governs the ability to retain or acquire foreign assets and the permissibility of foreign transactions.

• A person becomes a "Resident" under FEMA if they reside in India for more than 182 days in the preceding financial year with an intention to stay in India permanently.

• Once classified as a resident under FEMA, acquisition of new foreign assets requires RBI permission.

• However, retention of assets acquired while being an NRI is fully permitted.

Can a Returning NRI Retain Foreign Property?

Yes, under Regulation 4 of the FEMA (Acquisition and Transfer of Immovable Property Outside India) Regulations, 2015, a person resident in India may continue to hold foreign immovable property if:

• It was acquired while being a non-resident, or

• It was inherited from someone who was permitted to hold such property under foreign exchange laws

There is no requirement to dispose of such assets upon return to India.

Can the Outstanding Loan on the Foreign Property Be Repaid After Returning?

Yes. Under FEMA Notification No. 10(R)/2015-RB, repayment of loans availed abroad while being an NRI is permissible after return, provided:

• The loan was contracted when the person was a non-resident

• The repayment is made through one of the following:

  • Rental income earned from the foreign property

  • Balances held in NRE, FCNR, or RFC accounts

  • Remittance from India under the Liberalised Remittance Scheme (LRS), up to USD 250,000 per financial year

It is important to note that direct remittance from a regular Indian savings account without complying with LRS will constitute a FEMA violation.

Is Foreign Rental Income Taxable in India?

Yes, if the individual qualifies as a Resident and Ordinarily Resident under the Income Tax Act, global income including rental income from property situated abroad is fully taxable in India under Section 5(1).

If tax is also paid in the foreign country (such as Canada or the United States), relief under the relevant DTAA may be claimed through:

• Disclosure of such income in Schedule FSI of the Income Tax Return

• Filing of Form 67 before submission of the return to claim Foreign Tax Credit (FTC)

• Supporting documentation including foreign tax payment proofs and rent agreements

Reporting Obligations under the Income Tax Act

The following compliance steps are essential for ROR individuals:

Compliance Requirement	Tool or Form
Disclosure of foreign rental income	Schedule FSI in ITR-2 or ITR-3
Claim of Foreign Tax Credit (FTC)	Form 67 (mandatory before filing ITR)
Disclosure of foreign assets	Schedule FA
Reporting of capital gains (if any)	Schedule CG and claim DTAA relief if applicable

Failure to disclose foreign assets may attract a penalty under Section 271FAA (₹50,000) and may, in willful cases, be prosecuted under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.

Making EMI Payments from India – LRS Process

If the returning NRI intends to pay EMIs from India, the following steps must be followed under the Liberalised Remittance Scheme (LRS):

1. Route the remittance through an Authorised Dealer (AD) bank

2. Select the appropriate purpose code (generally S0023 – Loan repayment abroad)

3. Submit required documents including:

   • Loan agreement

   • Proof of property ownership

   • Outstanding loan schedule

   • Tax residency declaration

Note: NRE and FCNR accounts may also be used if not yet re-designated; however, post-return, they should ideally be converted or closed as per FEMA guidelines. Use of RFC (Resident Foreign Currency) accounts is highly recommended for holding and utilising foreign funds post-return.

Sale of Foreign Property – Tax and Repatriation

A. Capital Gains Taxation

• Capital gains on sale of foreign property are taxable in the country of sale and again in India if the individual is ROR

• Relief is available under the DTAA through Foreign Tax Credit

• All such gains must be declared in Schedule CG of the ITR

B. Repatriation of Proceeds to India

Permissible under Regulation 4(2) of FEMA 2015, subject to:

• Proof of legal acquisition and loan repayment

• Documentation including sale deed, bank credit of sale proceeds, and tax payments abroad

• Ideally, funds should be received in India through banking channels or credited to an RFC account

Real-World Scenarios and Strategic Guidance

1. Jointly Owned Property with a Spouse Still Abroad

• Retention is permitted

• Rental income should be split based on ownership ratio

• Each owner must comply separately based on residential status

2. Inherited Foreign Property

• Retention is permitted without restriction

• Must be disclosed in Schedule FA

• Income or gains are taxable in India if the inheritor is ROR

3. Property Not Yielding Rent and EMI Burden Is High

• Consider sale to close the loan

• Repatriate proceeds

• Reinvest in a residential property in India to claim exemption under Section 54 or 54F, even if the capital gains arose abroad

• Route sale proceeds through RFC or through AD bank with full disclosures

Strategic Compliance and Documentation Checklist

Action Item	Frequency / Trigger
Determine residential status under FEMA and Income Tax	At the beginning of each financial year
Convert NRE / FCNR to RFC or Resident Account	Upon return to India
Open RFC account for managing foreign inflows	Immediately after return
Disclose foreign income in Schedule FSI	Annually while filing return
File Form 67 for FTC	Before filing ITR
Disclose property and foreign bank accounts	Annually in Schedule FA
Use LRS or RFC for EMI payment	Monthly or quarterly
Maintain complete documentation	Ongoing

Conclusion: Legally Sound and Strategically Wise

Returning NRIs are fully permitted to retain and manage their foreign property and associated liabilities, provided they align with FEMA regulations and fulfil tax compliance under the Income Tax Act.

With correct use of tools like the RFC account, Form 67, and proper LRS channels, the financial and legal risks can be fully mitigated.

A few key takeaways:

• Retention of foreign assets is legally allowed under FEMA

• EMI repayment must follow LRS or be made through eligible accounts

• Global income is taxable for RORs, but relief is available through FTC

• Disclosure of foreign assets and income is mandatory in Indian tax filings

• Strategic reinvestment can provide tax benefits under Section 54 or 54F

Proper planning, supported by documentary evidence and timely disclosures, can ensure a compliant and financially efficient post-return transition.

RCM on Rent Paid to Landlord with Inactive GSTIN — Legal & Practical Compliance Guide

In the world of GST compliance, one hidden risk can invalidate your entire Input Tax Credit (ITC) — that risk is paying rent to a landlord whose GSTIN is inactive.

You may think you're compliant because you paid GST on rent, but if the landlord's GST registration is cancelled or inactive, that invoice is invalid, ITC is denied, and you’re liable under RCM.

Legal Foundation: What the Law Clearly Says

Section / Rule	Legal Provision	Implication
Section 7(1)(a)	Renting commercial property = taxable supply	GST is applicable
Section 32(1)	No person can collect GST unless registered	Landlord with inactive GSTIN cannot charge GST
Section 9(3) + Notification 13/2017-CT(R)	If supplier is unregistered, recipient pays GST under RCM	You (tenant) must pay GST under RCM
Rule 31(3)(f) & (g)	Self-invoice and payment voucher must be issued for RCM	Required documentation under RCM
Section 16(1)	ITC available on tax paid under RCM if all conditions met	You can claim ITC after paying RCM in cash
Section 24(iii)	Mandatory GST registration for persons liable to RCM	Even small businesses must register for GST if under RCM

What is an “Inactive GSTIN”?

An inactive GSTIN is either:

• Suspended (temporarily by the department), or

• Cancelled (voluntarily or by department).

Such a person is deemed unregistered, and cannot charge GST or issue valid tax invoices.

When to Apply RCM on Rent – Scenario Matrix

Scenario	GSTIN Status	GST Charged?	Action	RCM?	ITC Available?
A	Active	Yes	Pay rent + GST	❌	✅ Yes
B	Inactive	Yes (Invalid)	❌ Don’t pay GST	✅ Pay RCM	✅ On RCM
C	Inactive	No	Pay rent only	✅ Pay RCM	✅ On RCM
D	Inactive earlier, now Active	Depends on timing	Review period	✅ or ❌	Based on actual compliance

Step-by-Step Solution if Landlord's GSTIN is Inactive

✔ Step 1: Check GSTIN Status

Search landlord’s GSTIN at gst.gov.in → Save PDF/Screenshot.

✔ Step 2: Stop Paying GST to Landlord

Landlord cannot legally collect GST — don’t accept invoices with GST from inactive GSTINs.

✔ Step 3: Pay GST Under RCM

Pay 18% GST on rent from your electronic cash ledger using Form PMT-06.

✔ Step 4: Issue RCM Documentation

• Self-Invoice (Rule 31(3)(f)) — show GST breakup.

• Payment Voucher (Rule 31(3)(g)) — proof of payment.

✔ Step 5: File GSTR-3B Properly

• Table 3.1(d): RCM tax paid

• Table 4A(3): ITC claim (on RCM paid)

✔ Step 6: Claim ITC on RCM Paid

Only after actual tax payment (cash) and with valid RCM compliance, claim ITC in the same or eligible period (Section 16(4)).

✔ Step 7: Maintain a Complete Audit Trail

Rent agreement, GSTIN screenshots, bank proof, self-invoice, payment voucher, RCM challan → retain for 6 years.

What If You Already Made a Mistake?

❌ Paid GST to Inactive GSTIN and Claimed ITC

• Issue: Invoice is invalid → ITC will be disallowed.

• Fix:

  • Reverse ITC with interest.

  • Pay GST under RCM now.

  • Claim correct ITC on RCM.

❌ Didn’t Pay GST at All (No GST, No RCM)

• Issue: GST evasion risk.

• Fix:

  • Immediately pay RCM + interest.

  • Backdate self-invoice and payment voucher.

  • Claim ITC only if still within timeline.

❌ Paid RCM But Forgot to Claim ITC

• Fix:

  • You can claim ITC until 30th Nov of next FY or before filing Annual Return, whichever is earlier.

RCM on Rent – Sample Illustration

Particulars	Amount (₹)
Rent Amount	1,00,000
RCM GST @18%	18,000
Total paid to landlord	1,00,000 (no GST)
RCM paid to Govt	18,000 (cash)
ITC claimed	18,000

Most Asked Questions

Q1. What evidence proves a GSTIN is inactive?

Screenshot of GST portal search showing "Inactive" or "Cancelled" status with date and time.

Q2. Is ITC valid on GST paid to inactive GSTIN?

No. It is treated as tax collected without authority (Section 32 violation). ITC will be denied.

Q3. Do I need GST registration just for paying RCM?

Yes. Section 24 mandates registration even if total turnover is below ₹20/40 lakhs.

Q4. Can I use ITC to pay RCM?

No. RCM must be paid in cash. ITC can be claimed only after payment.

Q5. What if the landlord’s GSTIN is reactivated later?

You must assess:

• Was GST charged validly during inactive period? (No)

• If you already paid RCM, retain that position with evidence.

Avoid double taxation — seek professional advice.

RCM Risk Controls: Bulletproof Your Process

Control Area	Safeguard
GSTIN Status	Monthly tracking of vendor GSTINs
Rent Agreements	Clause that GST applies only if GSTIN is active
Vendor Master	Block auto GST booking if landlord GSTIN is inactive
Internal Audit	Quarterly check of RCM liabilities and ITC claim
Documentation	Auto-folder GSTIN check proofs, rent vouchers, etc.

Final Takeaway

Your landlord’s GST status affects YOUR compliance.

Paying GST to a non-operational GSTIN = invalid ITC + penalty.
Taking RCM responsibility = lawful ITC + peace of mind.

Holding Foreign Income through a Dubai Entity — A Legal and Strategic Advisory for Indian family businesses

Introduction

In today’s globally connected business environment, Indian entrepreneurs, professionals, and companies increasingly use overseas structures to manage international operations. Dubai, in particular, has emerged as a favored jurisdiction due to its investor-friendly regulations, world-class infrastructure, and business-friendly tax regime.

However, a critical legal question arises:

Can an Indian resident or company set up a Dubai-based entity, earn foreign income through it, and retain such income abroad without violating FEMA or triggering income tax obligations in India?

The short answer is: Yes, if the structure is legitimate, operations are substantive, and all compliance requirements under Indian tax laws and FEMA regulations are fully met.

This detailed guide addresses the legal, tax, and procedural framework to enable such arrangements within the law.

Legal Structure of a Dubai Entity: Options for Indian Promoters

Eligible Participants and Applicable Routes

Indian resident individuals may invest in a foreign entity using the Liberalised Remittance Scheme (LRS) under FEMA, with an annual cap of USD 250,000 per individual per financial year. Multiple family members can pool this limit.

Indian companies can invest through the Overseas Direct Investment (ODI) route, governed by FEMA 120 and the RBI Master Directions of 2022. The investment ceiling is linked to the Indian company’s net worth and must be reported through prescribed forms.

Non-resident Indians are not governed by FEMA when remitting funds from NRE or FCNR accounts and may invest without restriction.

Choice of Dubai Entity

• Free Zone Entity: Ideal for service, technology, and trading activities. May qualify for zero percent UAE corporate tax if meeting qualifying income criteria.

• Mainland LLC: Required for operating with UAE domestic clients. Corporate tax at nine percent applies beyond the profit threshold.

• Offshore Entity: Such as RAK ICC or JAFZA. These are suitable for holding or investment purposes but cannot engage in operational activity within UAE.

Indian Income Tax Law: Applicability of Global Income and POEM Risk

Global Income Taxation under Section 5

Indian residents are taxed on their global income. Thus, any income earned through foreign entities becomes taxable in India unless the foreign entity is independently controlled and managed outside India.

Place of Effective Management (POEM) — Section 6(3)

A foreign company will be deemed a tax resident in India if its place of effective management is situated in India during the relevant year. This means that if key decisions, board meetings, or actual control is exercised from India, the entire global income of the Dubai entity may be taxed in India.

Indicators That Trigger POEM Risk

• Key strategic and operational decisions are made from India

• Dubai entity lacks a functioning office, local employees, or physical infrastructure

• Board meetings are conducted virtually or from India

• Contracts are negotiated and signed in India

• Email trails and IT infrastructure show Indian control

Preventive Measures

• Conduct board meetings physically in UAE and retain minutes

• Sign contracts from within UAE only

• Hire local staff and maintain an operational office in Dubai

• Use UAE-based communication systems and servers

• Maintain independent administration and governance in UAE

The guiding principle is substance over form. Legal and operational independence must be demonstrable through documentation.

FEMA and ODI Compliance: Making the Investment Legally

For Individuals (Using LRS)

• Maximum remittance is USD 250,000 per person annually

• Multiple family members may combine their limits

• Funds may be used to acquire shares or provide loans to a Dubai company

• Filing of Form A2 and declaration with authorised dealer bank is mandatory

For Companies (Using ODI Framework)

• Must obtain Unique Identification Number from RBI before remittance

• File Form ODI Part I for initial investment, Part II for annual reporting, and Part III for any change in structure

• File Form FC if the capital contribution is made in kind

• Submit Annual Performance Report every year

Common FEMA Pitfalls

• Round-tripping of funds where income is routed back to India

• Non-reporting or delayed reporting of investment transactions

• Setting up shell entities without genuine business intention

• Using layering structures without economic substance

Every investment must be in a bona fide business with clear disclosures and robust documentation.

Holding Foreign Income in Dubai: Legality and Structuring

Indian residents may retain earnings in the Dubai bank account of their foreign company if:

• The services or goods are delivered from UAE

• The Dubai entity signs and executes contracts outside India

• The POEM of the Dubai entity remains outside India

There is no mandatory requirement under FEMA to repatriate such foreign income to India unless specific ECB conditions or guarantees apply.

The income can be reinvested in business operations or held as reserve without triggering any contravention, as long as all RBI reporting norms have been fulfilled.

Repatriation, Remuneration, and Tax in India

• Dividends distributed from the Dubai company to an Indian shareholder are taxable under Section 115BBD or as income from other sources based on shareholding.

• Salary paid to an Indian resident by the Dubai entity is taxable in India under Section 15.

• Director’s fees or royalties are also taxable in India for residents.

• If the shares of the Dubai entity are sold, capital gains are taxable in India under Section 45 for residents, subject to DTAA benefits.

Tax impact on repatriation may be minimized by timing distributions in years of lower income or available carried-forward losses in India.

Indian Income Tax Return Disclosures

For individuals, the following disclosures are mandatory:

• Schedule FA for declaring foreign shareholding and bank accounts

• Schedule FSI for foreign income if taxable in India

• Form 67 and Tax Residency Certificate to claim foreign tax credit if UAE tax is paid

Non-disclosure attracts penal provisions under the Black Money Act, which includes a flat penalty of ten lakh rupees per year for failure to report foreign assets.

Indian companies must maintain records of foreign subsidiaries, prepare consolidated financials where Ind AS applies, and comply with transfer pricing documentation under Section 92.

Example of a Compliant Dubai Structure

An Indian-resident tech entrepreneur sets up a Free Zone Entity in Dubai using pooled funds of USD one million from self, spouse, and adult children under LRS.

• Contracts are signed and executed from Dubai

• UAE staff and office are established

• Invoicing is done to EU clients who pay into the UAE bank

• Nine percent corporate tax is paid on net profits

• Income is retained in UAE for reinvestment

• Indian ITR discloses ownership and income as required

No Indian tax is triggered unless POEM is found or income is remitted voluntarily.

Caution Points and Lawful Tax Planning Ideas

• Ensure effective control of Dubai entity is outside India to avoid POEM

• Avoid back-to-back routing of funds to prevent round-tripping allegations

• File all RBI and FEMA forms in advance and on time

• Structure inter-company agreements at arm’s length prices to meet transfer pricing rules

• Repatriate income during years when Indian business incurs losses to reduce net tax liability

• Avoid using offshore entities with no operations or staff

• Maintain a status tracker of the Indian promoter’s residential status and foreign assets

 Essential Documentation Checklist

• Certificate of Incorporation and MOA of the Dubai entity

• UIN letter and RBI ODI filing acknowledgment

• Office lease agreement and utility bills in UAE

• Employment letters and payroll in Dubai

• Board minutes showing meetings in UAE

• Tax payment proof and UAE bank statements

• Form 67, TRC, and Schedule FA in Indian ITR

Conclusion

It is entirely lawful and strategically advantageous for Indian residents and companies to hold foreign income through a Dubai-based entity—provided that the structure is real, the business is bona fide, and all required disclosures and compliance measures are followed.

Control must lie outside India. Substantive presence in Dubai is the key. Once the entity demonstrates independent operations, tax planning within the boundaries of law is not only defensible but advisable.

Property Tax Rebate Deadline Extended — Delhi & Haryana Now Aligned

 The Municipal Corporation of Delhi (MCD) has extended the last date to avail the 10% rebate on lump-sum property tax payments for FY 2025–26 to July 31, 2025, matching the deadline already set by all Municipal Corporations across Haryana, including Gurugram (MCG), Faridabad (MCF), and others.

✅ New Uniform Deadline: July 31, 2025
✅ Applicable on: Full payment of current year tax (and arrears in Haryana)
✅ Covers: Delhi + All urban local bodies in Haryana

Advisory: Taxpayers should pay before the new deadline to secure the rebate and avoid penalties. RWAs and bulk property owners should alert residents accordingly.

Partner Retirement, Revaluation & Capital Settlement: Tax Analysis under Sections 45(4), 9B & 45(3) of the Income-tax

By CA Surekha Ahuja

A Critical Commentary with Tax Planning Guidance on Reconstitution Events in Partnership Firms

Introduction

Reconstitution in a partnership firm—whether through partner retirement, introduction of a new partner, or reshuffling of capital interests—has become a carefully scrutinized event under the Income-tax Act, 1961.

The Finance Act, 2021 fundamentally altered the tax consequences of such events through the introduction of Section 9B and substitution of Section 45(4), forming a dual-layered taxing mechanism for transactions involving money or capital asset payouts upon reconstitution of a firm.

This note provides a comprehensive legal and tax analysis of such transactions, particularly focusing on situations where the firm undertakes a revaluation of assets prior to partner exit and where capital settlements exceed book value. The analysis includes judicial guidance, CBDT circulars, and embedded strategic structuring ideas.

Provisions Governing the Transaction

Section 45(4) – Capital Gains on Reconstitution Events

As amended by the Finance Act, 2021, Section 45(4) taxes the firm when a partner (specified person) receives money or capital assets or both upon reconstitution, and such receipt exceeds their capital account balance (excluding revaluation or self-generated goodwill).

Capital Gains = A – B,
where
A = Money received + FMV of capital asset received, and
B = Capital account balance (excluding revaluation and goodwill)

This is a deemed transfer, and the resulting capital gain is taxable in the hands of the firm.

Section 9B – Deemed Transfer of Capital Asset or Stock-in-Trade

Section 9B creates a deemed transfer when the firm distributes a capital asset or stock-in-trade to a partner at the time of reconstitution.

The firm shall be taxed on the FMV of the asset transferred on the date of such event.

Section 9B applies independently of Section 45(4), and both can be triggered in the same transaction, potentially leading to double taxation unless managed carefully.

Section 45(3) – Contribution of Capital Asset by Partner

This section applies when a partner introduces a capital asset into the firm. The transfer is taxable in the hands of the partner, with the FMV on the date of contribution deemed as consideration.

This provision is relevant at the time of formation or capital expansion, not during exit.

CBDT Circular No. 14/2021 – Implementation Guidelines for Sections 45(4) and 9B

This circular is crucial for interpreting computation mechanics, particularly:

• Revaluation gains are to be excluded while computing the capital account balance under Section 45(4)

• Sections 45(4) and 9B operate independently

• Double taxation is permissible under both provisions, subject to adjustment rules under Rule 8AB

Application to Practical Scenarios

Scenario 1: Retirement with Revaluation and Payout from Firm

If a partner retires and the firm has revalued its land/building just prior to retirement, the capital account balance reflects the increased value. However, Section 45(4) requires ignoring such revaluation.

If the payout exceeds the original capital balance (without revaluation), then the firm is taxed on the differential amount as capital gains.

Key Point: Revaluation increases do not shield the firm from tax under Section 45(4).

This is especially critical in real estate-rich firms where revaluation uplift is significant but results in notional gain with real tax liability.

Scenario 2: Distribution of Capital Asset to Retiring Partner

If the firm settles the retiring partner’s dues by transferring land or building, the following apply:

• Section 9B: Deemed transfer by the firm, capital gain computed on FMV – indexed cost

• Section 45(4): If FMV + cash paid exceeds capital account balance (excluding revaluation), additional capital gains taxed in firm’s hands

This leads to dual taxation unless carefully structured and staggered.

Tax Complexity: The firm is taxed on both the deemed transfer (Section 9B) and deemed reconstitution gain (Section 45(4))

Scenario 3: Incoming Partner Pays Retiring Partner Directly

If the incoming partner pays the outgoing partner directly, and the firm is not involved in the payout, then:

• Section 45(4) is not attracted as there is no payment from the firm

• Section 9B is not triggered as the firm is not distributing any asset

• Outgoing partner is taxed under Section 45 on capital gains arising from transfer of partnership interest

Tax Efficiency: This structure is more tax-neutral for the firm, and tax liability arises only in the hands of the retiring partner

Note of Caution: The transaction must have commercial substance. If the firm’s reconstitution is merely a façade to route payment through a new partner, GAAR principles may be invoked.

Judicial and Administrative Guidance

Mohanbhai Pamabhai v. CIT [1973] 91 ITR 393 (Guj) / 165 ITR 166 (SC)

Held that partner’s retirement does not amount to a transfer if no asset is received. However, the new deeming fiction under Section 45(4) overrides this in case of post-2021 transactions.

Dynamic Enterprises v. CIT [2013] 359 ITR 83 (Karnataka HC)

Supported the view that retirement is not a transfer unless capital assets are transferred. Again, no longer applicable post-insertion of Section 9B and amended 45(4).

CBDT Circular No. 14/2021

Clarifies that revaluation of assets is ignored for computing capital account under Section 45(4), and that Section 9B and 45(4) apply independently, which may result in dual capital gains taxation.

Strategic Structuring and Tax-Saving Guidance

Avoid Revaluation Before Partner Exit

• Do not revalue assets immediately before retirement

• Such revaluation is tax-ignored but increases settlement, resulting in tax without real gain

• Keep capital accounts unrevalued for Section 45(4) computation

Prefer Incoming Partner to Pay Retiring Partner Directly

• Keeps the firm tax-neutral

• Retiring partner taxed under capital gains on transfer of partnership interest

• Ensure proper valuation and commercial rationale to avoid anti-avoidance scrutiny

Cap the Settlement to Original Capital + Retained Profits

• Payout from the firm must not exceed the original capital account balance, excluding any revaluation uplift

• Settling only the legitimate capital + accumulated reserves avoids Section 45(4) exposure

If Asset Must Be Transferred – Sequence Carefully

• Stagger events to avoid triggering both Section 9B and 45(4) in the same year

• Alternatively, use a combination of partial cash settlement and deferred compensation to spread tax impact

Document All Valuations and Agreements Meticulously

• Maintain evidence-based valuations for property and business interests

• Clearly document capital account balances, reconstitution deeds, and exit terms

Concluding Observations

Post-2021, the tax treatment of partner exit, reconstitution, and capital restructuring has shifted from being form-driven to substance-driven and value-linked.

Sections 45(4) and 9B are powerful anti-abuse provisions aimed at taxing notional or disguised gains through revalued payouts or asset distributions. However, they also risk taxing legitimate business settlements unless planned with precision.

The guiding principle for tax practitioners and business advisors must be:

Minimise asset-based payouts by the firm,
Avoid revaluation just prior to exit,
Wherever possible, structure exits as direct settlements between partners,
And document everything in line with the current law and commercial substance.

 Key References

• Income-tax Act, 1961: Sections 45(3), 45(4), 9B, 10(2A), 48(iii)

• Rule 8AB, CBDT Circular No. 14/2021

• Mohanbhai Pamabhai, Dynamic Enterprises, McDowell & Co. v. CTO

• Relevant sections of Indian Partnership Act, 1932 for defining rights and reconstitution procedures

 

Can a Woman Be the Karta of a Hindu Undivided Family? – Law, Rights, and Judicial Precedent Post-2005

1. Introduction

The concept of Karta—the functional and legal head of a Hindu Undivided Family (HUF)—has historically been anchored in patriarchal tradition. Under classical Mitakshara Hindu law, the eldest male coparcener has the authority to manage the property and affairs of the HUF.

However, with the advent of the Hindu Succession (Amendment) Act, 2005, granting equal coparcenary rights to daughters, a significant jurisprudential question emerged:

Can a daughter, now a coparcener by birth, become the Karta of the HUF?

Indian courts have now answered this question decisively in the affirmative, reinforcing constitutional principles of equality and enabling a daughter to assume managerial control over ancestral property.

This article provides an exhaustive discussion on this issue, integrating statutory provisions, judicial decisions, income-tax implications, and practical guidance.

2. Legal Framework: Coparcenary and Karta

2.1 Traditional Hindu Law: Concept of Coparcenary

A coparcenary is a narrower subset within an HUF comprising male members who acquire a birthright in joint family property. Under Mitakshara law, coparceners traditionally included:

• A father

• His sons

• Grandsons

• Great-grandsons

Only coparceners had the right to:

• Demand partition

• Acquire interest by birth

• Act as Karta

Until 2005, women were excluded from the coparcenary, and hence could not be Kartas.

2.2 Karta: Functions and Powers

The Karta is the de facto manager of the HUF and exercises significant powers, including:

• Managing ancestral property and finances

• Representing the HUF in legal and tax matters

• Filing income tax returns (under Section 140(c) of the Income-tax Act, 1961)

• Entering contracts and conducting business on behalf of the HUF

• Borrowing money and alienating assets under necessity

The Karta’s powers are quasi-trustee in nature and must be exercised for the benefit of the family.

3. Statutory Revolution: Hindu Succession (Amendment) Act, 2005

3.1 Pre-2005 Position

Before 2005, daughters in Mitakshara HUFs were only members, not coparceners. They could not demand partition, inherit by survivorship, or become Karta.

3.2 Section 6 as Amended

Section 6(1), Hindu Succession Act, 1956 (post 2005 Amendment):
“On and from the commencement of the Hindu Succession (Amendment) Act, 2005, in a joint Hindu family governed by Mitakshara law, the daughter of a coparcener shall by birth become a coparcener in her own right in the same manner as the son...”

3.3 Key Consequences of the Amendment

• Daughters become coparceners by birth

• They have the same rights and liabilities as sons

• They can demand partition, receive equal share, and represent the HUF

Though the Act was silent on the position of Karta, its language clearly vested coparcenary rights in daughters, opening the door for them to assume managerial roles.

4. Landmark Judgment: Sujata Sharma v. Manu Gupta

Delhi High Court, 2015 | Citation: 221 (2015) DLT 327

Sujata Sharma, the eldest daughter in the family, sought to be recognized as the Karta of the HUF after her father’s death. Her claim was challenged on the basis that customary law did not recognize women as Kartas.

Issue:

Whether a female coparcener, being the eldest in the family, can be appointed as Karta of the HUF.

Held:

Justice Najmi Waziri ruled:

“If a male Hindu, by birth, can be a coparcener and, therefore, be a Karta, so can a female Hindu. The absence of a son cannot be the reason to deny the eldest daughter of the coparcener her rightful place as Karta.”

Key Legal Principles:

• The 2005 amendment removed gender-based restrictions from the Mitakshara coparcenary system.

• The right to be a Karta flows from one’s status as a coparcener, not gender.

• Customary disqualification cannot override statutory equality.

• The judgment affirms that legal capacity must evolve with constitutional values.

5. Who Can Act as Karta?

Individual	Eligible as Karta?	Legal Basis
Eldest male coparcener	✅ Yes	Traditional and statutory recognition
Eldest daughter (post-2005)	✅ Yes	Section 6(1) + Sujata Sharma judgment
Widow of coparcener	❌ No	Not a coparcener by birth; only a member
Minor son/daughter	❌ No (directly)	Can be represented through natural/legal guardian
Married daughter	✅ Yes	Marriage does not extinguish coparcenary rights
Daughter-in-law	❌ No	Not a coparcener by birth

6. Income Tax and Compliance Implications

6.1 Section 140(c) – Authorized Signatory

Under the Income-tax Act, the Karta is the signatory for HUF returns. If the Karta is deceased or unavailable, any adult member may sign. After the Sujata Sharma ruling, female coparceners can be Kartas and can:

• File the HUF’s income tax return

• Apply for PAN in the name of the HUF

• Operate bank accounts

• Be the representative assessee

6.2 Property and Transactional Validity

• Registrars must accept a female Karta’s signature on sale, gift, or transfer deeds of HUF assets.

• Banks and financial institutions should not refuse account operation by a female Karta when validly evidenced.

7. Practical Illustration

Case Study:

• Mr. A (father) – deceased in 2020

• Ms. B (daughter, aged 34)

• Master C (son, aged 16)

• Mrs. D (wife, aged 60)

As per Section 6, Ms. B became a coparcener by birth and is now the eldest living coparcener. She has the statutory and judicial right to act as Karta of the HUF.
Mrs. D, though elder, is not a coparcener and hence cannot be Karta, unless acting as guardian for minor C.

8. Frequently Asked Legal & Tax Questions

Q1. Does marriage affect a daughter’s right to be Karta?
No. Her coparcenary rights continue despite marriage.

Q2. Can a mother be Karta of her husband’s HUF?
No. She is a member, not a coparcener. However, she may act as guardian of a minor Karta.

Q3. What if the male coparcener is younger than the daughter?
The eldest living coparcener, irrespective of gender, has the primary right to be Karta.

Q4. Is the Sujata Sharma ruling applicable pan-India?
While binding within Delhi jurisdiction, it holds strong persuasive value elsewhere unless overruled by the Supreme Court or another High Court.

Q5. Can a woman manage HUF property independently?
Yes, if she is Karta or coparcener. Even as a member, she may manage under limited authority (e.g., guardian role).

Q6. Can Income Tax authorities object to female Karta?
No. Income-tax forms and PAN applications legally recognize female Kartas if valid documentation is provided.

9. Conclusion

The evolution of coparcenary law post-2005 and judicial recognition through Sujata Sharma v. Manu Gupta has conclusively established that a woman can be the Karta of a Hindu Undivided Family.

This change reflects not only statutory intent but also a constitutional commitment to gender equality. While social acceptance may lag, the legal pathway is now unequivocally clear.

It is imperative for tax professionals, legal practitioners, and financial institutions to update their understanding and practices to accommodate and uphold the rights of women as equal stakeholders and managers of HUF property.

Taxability of Foreign Salary, Foreign Tax Credit and Form 67 – A Complete Compliance Guide for Globally Mobile Indian Residents (AY 2025–26)

By- CA Surekha

1. Introduction

International mobility is now routine for Indian professionals. However, when a taxpayer earns income in one country and is taxable in another, a careful application of the Indian Income-tax Act becomes critical to avoid double taxation, ensure timely tax relief, and maintain disclosure compliance.

This guide provides a complete treatment of foreign salary taxation, double taxation relief under treaties, foreign tax credit through Form 67, and Schedule FA disclosures – especially in cases of mid-year relocation to or from India, focusing on the Assessment Year 2025–26.

2. Legal Foundation – Sections 5, 6, and 90 of the Income-tax Act

2.1 Section 5 – Scope of Total Income

Taxability of income in India depends on the individual’s residential status.

• A Resident and Ordinarily Resident (ROR) is taxable on global income.

• A Resident but Not Ordinarily Resident (RNOR) is taxable only on Indian-sourced income and foreign income controlled from India.

• A Non-Resident (NR) is taxed only on income received or accrued in India.

2.2 Section 6 – Residential Status Rules

An individual is considered Resident if:

• He is in India for 182 days or more during the financial year, or

• He is in India for 60 days or more in the year and 365 days or more in the preceding four years.

Among residents, an individual is Resident and Ordinarily Resident if:

• He was resident in India in two out of the ten preceding years, and

• He was in India for 730 days or more in the preceding seven years.

Others are treated as Resident but Not Ordinarily Resident.

3. Scenario A – Indian Resident Moves Abroad Mid-Year

Situation:

An individual residing in India until December 2024 moves to the USA in January 2025 for employment. Salary is earned in the USA from January to March 2025. US federal tax is withheld.

Indian Tax Treatment:

If the person qualifies as Resident and Ordinarily Resident, the foreign salary (Jan–Mar 2025) is taxable in India. Relief under the India–USA DTAA is available by claiming foreign tax credit (FTC) under Section 90, provided Form 67 is filed before the return.

Illustration:

Particulars	Amount
US salary from Jan–Mar 2025	USD 15,000
US tax withheld	USD 3,000
Exchange rate (SBI TT Buying, 31-Mar-25)	₹83
Salary in INR	₹12,45,000
US tax in INR	₹2,49,000
Indian tax on this salary	₹3,85,000
FTC allowable	₹2,49,000

4. Scenario B – Returning to India Mid-Year

Situation:

An individual returns to India on 15 December 2024 after working in the USA from April to November 2024. He is a Resident and Ordinarily Resident for FY 2024–25.

Indian Tax Treatment:

US salary earned before returning to India is taxable in India, even if received in the USA. The person can claim foreign tax credit via Form 67 for US tax deducted.

Illustration:

Particulars	Amount
US salary from Apr–Nov 2024	USD 60,000
US tax paid	USD 12,000
INR conversion rate	₹83
Salary in INR	₹49,80,000
US tax in INR	₹9,96,000
Indian tax on same income	₹11,80,000
FTC allowable	₹9,96,000

5. Scenario C – Tax Year Mismatch: India (FY) vs USA (Calendar Year)

Issue:

India follows a financial year ending March, but US tax returns are filed for a calendar year (Jan–Dec). This often causes a timing gap where Indian tax is due before the US return is filed.

Solution under Rule 128:

• FTC is allowed if tax is paid or deducted before filing the Indian return.

• If US tax is paid after filing the Indian return, credit can be claimed next year under Rule 128(9).

6. Reporting of Foreign Assets – Schedule FA

Applicable only if taxpayer is Resident and Ordinarily Resident.

Assets to be disclosed:

• Foreign bank accounts (even zero balance)

• Equity and mutual fund holdings

• Foreign property

• Foreign pension plans (e.g., 401(k))

• Any foreign entity interest or trust

Non-Residents and RNORs are exempt from Schedule FA.

7. Filing Form 67 – Mandatory Conditions

Legal Basis:

Form 67 must be filed under Rule 128(8) before filing the return of income under Section 139(1), in order to claim FTC under Section 90 or 90A.

Contents of Form 67:

• Country and TIN or SSN

• Nature of income (e.g., salary)

• Foreign tax paid

• Indian tax payable on same income

• Evidence of tax deduction or payment

• Date of payment

• Conversion using SBI TT Buying Rate on 31 March

Late Filing:

Form 67 must be filed before filing the ITR. Late filing disqualifies FTC unless allowed judicially.

8. Residential Status and Tax Obligation Summary

Date of Movement	Residential Status	Foreign Salary Taxable in India	FTC via Form 67	Schedule FA Filing
1 October 2024	Resident and Ordinarily Resident	Yes	Yes	Yes
15 December 2024	Resident and Ordinarily Resident	Yes	Yes	Yes
25 December 2024	RNOR	No	No	No
10 January 2025	RNOR	No	No	No
2 February 2025	Non-Resident	No	No	No

9. Stepwise Compliance for AY 2025–26

Step 1: Determine residential status using Section 6
Step 2: Identify foreign salary period taxable in India
Step 3: Convert income and tax paid using SBI TT buying rate as of 31 March 2025
Step 4: File Form 67 with supporting documentation before ITR
Step 5: File Schedule FA if ROR
Step 6: Retain W-2, 1040, employer TDS certificates and Form 67 acknowledgement

10. FAQs – Foreign Salary, FTC & Form 67 (AY 2025–26)

Q1. Is Form 67 mandatory to claim FTC in India?
Yes. Under Rule 128(8), Form 67 must be filed before filing the ITR. Omission may forfeit FTC unless cured judicially.

Q2. What if foreign tax is paid after ITR is filed?
Under Rule 128(9), FTC can be claimed in the next assessment year, provided Form 67 is filed with proof of payment.

Q3. Can I claim FTC without having filed a US tax return?
Yes, if US TDS has been deducted and evidenced (e.g., payslip, W-2), FTC may be claimed.

Q4. Which exchange rate is used for conversion of foreign tax?
SBI TT Buying Rate as on 31 March of the financial year (per Rule 26).

Q5. Can Form 67 be revised?
As of now, the portal does not allow online revision of Form 67. Fresh filing with justification may be required.

Q6. Is FTC available for state taxes paid in the USA?
No. FTC under Indian law is allowed only for federal income taxes, not state or local taxes.

Q7. Can RNOR claim FTC or file Form 67?
No. FTC applies only if income is taxable in India. RNOR is not taxed on foreign salary not received in India.

Q8. Is Form 67 required if foreign income is not taxable?
No. If income is not offered to tax in India, Form 67 is not applicable.

Q9. Do I need to file Schedule FA if I am RNOR?
No. Schedule FA is applicable only for Resident and Ordinarily Residents.

Q10. Do I declare a foreign bank account with zero balance?
Yes, if you are ROR and the account was active during the year, it must be disclosed.

Q11. Is FTC allowed on foreign income taxed at a flat rate (like 15%)?
Yes, subject to proof and limitation to Indian tax payable on such income.

Q12. What if the foreign income is exempt in India?
Then no FTC is needed. Form 67 is not applicable if the income is not offered to tax.

Q13. Can Indian tax be paid now and claimed back once US return is filed?
No. Indian tax once paid cannot be refunded merely due to later FTC eligibility unless revised return is filed within time.

Q14. Is the FTC limited to foreign tax or Indian tax?
FTC is limited to the lower of foreign tax paid or Indian tax payable on the same income.

Q15. Are both employer deduction and self-paid foreign tax eligible for FTC?
Yes. As long as valid evidence is available and tax pertains to income offered in India.

11. Conclusion

For Indian residents earning foreign salary or relocating between jurisdictions mid-year, compliance under Sections 5, 6, 90, and Rule 128 is non-negotiable. Claiming foreign tax credit is not automatic and must be supported by documentary evidence and timely Form 67 filing.

Residential status determines everything – from whether the income is taxable, to whether foreign assets must be reported, and whether relief is even available.