Author: Amit Roy

Taxation of investments in Indian Mutual Funds in the UK

Gains made on disposal of Indian mutual funds are taxed at highest marginal rate of taxation

HMRC has classified overseas mutual funds as `reporting` and `non-reporting`.

Reporting means mutual funds which provided certain data to HMRC on periodic basis. HMRC publishes a list of these funds monthly. In case your mutual fund is such a fund your gain will be taxed as Capital Gains.

Non-reporting means any mutual funds which do not comply with these requirements.

Recently funds in India have started registering with HMRC and have become reporting funds so we recommend you check HMRC list before tax calculation. For a list of reporting offshore funds click here.

When you dispose offshore non-reporting mutual funds

Any gain on disposal of investments in Offshore non-reporting mutual funds (i.e., any fund based outside UK) will be taxed at the highest marginal rate of income tax and not as capital gains.

Double whammy – in case of loss, the loss is only allowed to be set-off against capital gains and not against income .

Lastly, annual capital exemption is also not available to such gains.

Conclusion: From a tax perspective, if you wish to invest in Indian stock market better invest directly in stock and shares and not via a Mutual fund.

Bonus:

  1. An article with an example.
  2. This is a complex area of law; further information can be seen at HMRC Investment Funds Manual – IFM12000 and IFM13000.
  3. Offshore gain is treated for tax purposes as miscellaneous income – [see Tolley Income tax annual 50.3] to be mentioned in SA106 2023 in Box 41.

Further reading:
1. HS265 Offshore Funds
2. Visit our Worldwide Disclosure blog.
3. To know about taxation of UK mutual funds.

Incentive for manufacturers in UK

UK government does not support its manufacturing and farming industries like other countries.

Current incentives are listed below:

  1. Super deduction

Only Companies that incur qualifying expenditures between 1 April 2021 to 31 March 2023, can claim:

  • a super-deduction allowance of 130% on most new plant and machinery investments that ordinarily qualify for 18% main rate writing down allowances
  • a first-year allowance of 50% on most new plant and machinery investments that ordinarily qualify for 6% special rate writing down allowances

Thus, super-deduction of 130% will provide a deduction exceeding the cost of the asset and first year deduction of 50% will accelerate allowances.

Exclusions

  1. Used and second hand will not qualify.
  2. It should not be a car
  3. Expenditures on contracts entered into prior to 3 March 2021 even if expenditures are incurred after 1 April 2021. 
  4. Plant and machinery expenditure which is incurred under a Hire Purchase or similar contract must meet additional conditions to qualify

Source:

ACCA guidance

2. Research & Development

This is more difficult to qualify but has higher rewards. If a company incurs expenditure to make an advance in science or technology, it can claim R&D relief:

  • deduct an extra 130% of their qualifying costs from their yearly profit, as well as the normal 100% deduction, to make a total 230% deduction
  • claim a tax credit if the company is loss making, worth up to 14.5% of the surrenderable loss

Source

Gov.uk

3. Government support directory

UK Government has made a helpful directory where businesses can find funding in shape of grants, equity and debt. Access it via link

4. Local chamber of commerce

One can join local chamber of commerce to meet similar businesses and share ideas and contacts.

Remittance out of India

There are two main types of accounts in India. NRE and NRO both are maintained in INR.

 NRENRO
PurposeFor sending monies to India from another countryFor funds generated in India like rental income
RepatriationFully repatriable i.e. all funds in this account can be sent out of India without any restrictions.Repatriation limit of USD one million per financial year.   Plus, paperwork needs to be completed before sending funds out of India.1

Paperwork to remit funds out of India or to convert NRO funds into NRE:

  1. NRE/NRO remittance forms
    NRE does not need any other documents, documents listed below are for NRO:
  2. Form A2  – Funds transfer form. Purpose code to use it S1301 – Remittance for family maintenance and savings
  3. Please ask the Bank for the BSR Code for the Branch. Indian CA will need it.
  4. Form 15CB – Chartered Accountant certificate from Indian CA
  5. Form 15 CA – Self declaration from Indian CA
  6. UDIN from Indian CA
  7. Source of funds like contract notes of share sale etc. from client or his Indian broker.

    Bankers will need original wet signature forms and self-attested documents so allow sufficient time for courier.

A useful blog I found on this subject.

August 2021

Recently a client wished to invest funds in the Indian stock market and he contacted his old bank where he had a dormant account, after lot of paperwork and telephone calls finally the bank was able to activated NRO accounts and client started sending funds to India in his NRO account.

We realised that this is not the optimum solution for the client as he is sending his overseas earnings to India and will face restrictions in the future if funds are sent via NRO account, see above for restrictions.

We have requested the banker to change the arrangement to NRE account, let see how things turn up.

November 2021

NRE PIS account opened after months of to and fro.

December 2021

Client wanted to transfer shares held in NRO account to NRE account but due to lack of clear rules, this project was abandoned.

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

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

For basic guidance on foreign income see gov.uk: link.

Is overseas interest income taxable in the UK?

Example, a UK tax resident have a fixed deposit in India and earns interest on it, does he have to pay tax on that earned interest income in UK?

Brief answer is Yes. Source: see point 6.62 of RDR1 guidance.

Thus, all interest earned on NRO,NRE or FCNR deposits (savings and fixed deposits) are taxable in the UK.

This blog post deals with NRE and FCNR deposits for NRO see link.

Is there any relief, as this income may suffer tax twice once in India and again here in the UK?

Yes, Double Taxation Relief (DTR) is available see our blog DTR.

Besides DTR does UK India Double taxation agreement have any other provision which can lower my tax bill? Yes, in case of NRE and FCNR accounts there are special provisions, read below:

  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)
  • Tax spared relief is restricted to a period of 10 years from the tax year from which tax exemption is first granted from Indian income tax – Article 24 (5). HMRC has clarified that 10 year period is for each account. So new account will restart the time period. Note commercial banks in India usually make fixed deposits for 10 years or less. Please ensure to get a new account number allocated for the new fixed deposit.
  • 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 as mentioned in DTAA:
SectionsType of Income
10(4)Non-Resident (External) Account
10(15) (iv)FCNR Deposits
Other sectionsNot relevant for present scenario

Conclusion:

Interest on NRE and FCNR Deposits gets Foreign Tax Credit Relief without paying tax in India. 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:

  1. 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.

2. Interest on Fixed Deposits – interest arises and is taxable each year as it is credited. see Example 2 on SAIM2440

3. Interest Certificate – Your bank can easily provide this certificate for individual tax years. It will make tax computations much easier.

4. For further reading, visit our Worldwide Disclosure blog.

Is Pension a taxable benefit ?

It’s that time of the year when year-end reporting for PAYE is in focus.

Everybody is confused about the yearend tasks, taxable benefits, PAYE settlement agreements.

Due to auto enrolment many of the employers are now paying pension to their staff.

I was confused about whether employer’s contribution towards pension will be a taxable benefit.

No where I have heard that it is the case but it is always good to double check if a doubt comes to your mind.

I started searching – no answers !!!

Finally I came across HMRC guide CWG2 , it clearly states that Pension contributions are NOT to be included PAYE tax or NIC ; refer Chapter 5

March 2021 – Legislation reference 

Employer’s contribution to employee’s registered pension schemes do not count as earnings or taxable benefits under ITEPA 2003, s 308.

Plus, they do not attract employers’ NICs (SI2001/1004, Sch 3)