Understanding Roth IRA & its taxation in US

Video transcript below (auto-transcription can cause some errors) –

Hello, and welcome. This is CA Abhinav, and I welcome you. In this, in the earlier video, I discussed about the, taxation of, the India taxation of, 41 k, or traditional IRA. You can check that video. In this video, I am discussing about Roth IRA taxation in India.

How Roth IRA? Roth IRA I made a separate video. What is understanding Roth IRA and its taxation in US? This video is Roth IRA taxation in India. Right?

So let’s get started. So, again, it all depends the taxation in India depends on a person’s residential status in India. So till a person is a nonresident or a resident and not ordinarily resident in India, There is no tax, no reporting requirement in India with respect to the Roth IRA. So that means you can do anything with your Roth IRA. Whatever you do, India has no concern with it, and it is neither taxable, not reportable in India.

Provided you are a nonresident as per Indian tax law. Or if you have returned back to India after a considerable stay in US for, like, 1 to 3 years after your return, you may be a r naught, not always. Some people who don’t who don’t have a considerable stay, they just become ROR from the year 1 of the return. But if you qualify with the r NOR, stage, there is no tax, no re reporting requirement in India. Now we come to the situation where the person becomes a ROR resident, an ordinary resident of India.

Now here the general principle as for the tax law Indian tax law is that the worldwide incomes of that person is taxable. Now Indian tax department doesn’t recognize Roth. Right? Roth is a US investment product. Right?

So in US, there is the special provisions in the internal revenue code on how to recognize the income, how to, you know, how the income is be taxed with for Roth, for, you know, 4 zero one k and all. But India, there is no they don’t recognize. In India, we have to go by what the strictly the Indian tax system says, right, on any income, how it is being taxed. Right? So here, what happens is the contribution that you make in the Roth after becoming a Indian, tax resident, ROR, there’s no tax.

Right? Because there’s no tax on the contribution. There’s no even a tax reduction. Right? It’s all there in the US.

In US also in Roth, you don’t get a tax deduction. So contribution is totally non event for index purposes. Then we come to income. Right? Now income, it depends.

Right? See, now income that you accrue in the fund. Now here understand very important thing in 2021 there was a new provision introduced with which was Section 89A. Section 89a referred to Rule 21AAA which said that India is okay with deferring the tax, to the withdrawal in case that tax is withdrawal there is a withdrawal based taxation in the other country. Now understand this. Some people have this misconception, and, I want to just clarify that this particular relief that is there, if you get if you make this election, is only available for investments where the withdrawal is taxable.

In Roth, it is different. In Roth, basically, what you do is that you contribute from post tax dollars, and there is basically no tax on withdrawal. It’s basically tax free on withdrawal. So it will be tricky to assume you can take this interpretation if you want to, but in my view, that will not be a correct interpretation of Rule 21AAA. In my view, for Roth, the 21AAA election relief will not be available for Roth kind of investments, and income will be though the income is totally tax free, so you may have invested in US thinking that the income is totally tax free, and, yes, it is tax free for US tax purposes, and withdrawal is tax free completely.

However, Indian government will totally ignore this this kind of an arrangement that is there in US. Right? Because it doesn’t recognize Roth as a separate investment. It will tax the income that is every year, whatever is the accretion. So, for example, you have invested 100 rupees in Roth.

Every year, there’ll be, like, a 10 rupees of accretion. It can be by way of dividend or capital gains. So you have to pay the dividend the you have to calculate the income, the accretion only, not the contribution. Right? Indian government can only tax the income.

So you need to make that contra different you need to differentiate, first of all, between the you need to differentiate the income. You need to take out the statement, check what is the income from the fund, right, after RNOR. Till r till your sorry. Till RNOR, there is no problem. No reporting requirement.

But after becoming an r naught, every year you need to take out the statement, calculate the income. Okay. 10 rupees income is there. Then you find that 5 rupees is dividend, 5 rupees is capital gain. So dividend, you need to declare an income from other sources.

Capital gain, you need to declare in capital gain. Now capital gain will be the treatment will be as a unlisted share because it is not the shares are not listed in India. So it will be the holding period will be 24 months. So less than 24 months, it is taxable as per slab rates. More than 24 months, it’s 20% plus indexation 20% with indexation benefit.

Right? So, accordingly, you need to calculate and pay tax every year on the income in that fund. And, also, the income and asset need to be reported and Schedule FSI and FA. So you need to select either ITR 2 or ITR 3. 2, if you don’t have business income. 3, if you have business income. ITR 1, you cannot choose because every year you need to disclose FSI and in the FSI and FA in your Indian tax return. If you don’t disclose, then there are severe penalties, which includes monetary penalty and even a possible imprisonment, right, under the black money law. So you need to be very careful every year making these disclosures in the tax return. Now if you roll out another IRA, IRA now if rollover, I’m not sure whether you can do it as a nonresident alien, but I’m just listing out the provisions.

Direct rollover, there’s no tax. If the trustee to trusted rollover is there, in my view, there is no tax on that. But indirect rollover, if you are doing whereby you receive a check, and then you are, you are putting it to another kind of a provider. In my view, that may be held taxable. The income from the entire withdrawal that you do of the entire fund, that may be held taxable in the year you do a indirect rollover even though you make the indirect rollover within 60 days, which is, like, tax free as per US tax law, but it get for Indian tax law purposes, the fact that you have done a indirect rollover, you’ve taken out the money, may be held taxable in India.

Right? Then we come to withdrawal. Now since Rule 21AAA election by relief is not available, so what you need to do is that you need to offer the income from the fund every year to tax, every year in your tax return. So, basically, when you withdraw the money, then there is no separate tax at the time of withdrawal because every year see, 401k or traditional IRA, it was different. You make Rule 21AAA election.

It is not taxable till the year after age 59.5 that you make the withdrawal, and then you call accordingly calculate the tax for the entire duration and pay for the withdrawal. Here, since you are making the income, you are paying the tax every year, then there is no separate tax at the time of withdrawal because it is anyways taxed on a accrued basis every year as I’ve mentioned above. So this is Roth IRA taxation for you. If you have any queries, do please share in the comments section. Thank you so much for watching this video.

Thank you so much. Bye.


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