I am an Indian tax resident holding US situs assets. Am I exposed to US estate tax, and how does US tax law treat such cases?
–Name withheld on request
To assess US tax exposure, it is important to first distinguish between two related but distinct aspects of US tax law: Income tax and transfer taxes, the latter covering gift tax, estate tax, and generation-skipping transfer (GST) tax.
US income tax applies primarily to US citizens and US residents. Residency for income tax purposes is determined largely through objective tests based on physical presence in the US over a prescribed period. Green card holders are treated as US residents for income tax purposes, irrespective of the time actually spent in the US. As a result, US citizens and residents are taxed on their worldwide income.
Transfer taxes operate on a different footing. While they also apply to US citizens and residents, the concept of “residence” for transfer tax purposes is not based on physical presence. Instead, it turns on whether an individual is domiciled in the US. Domicile is a legal concept referring to a person’s permanent home—the place to which they intend to return, regardless of temporary residence elsewhere. Determining domicile involves a detailed, and often subjective, assessment of facts, with no fixed statutory formula.
Non-citizens who are not domiciled in the US are subject to US transfer taxes only in limited situations. Most significantly, the US estate tax applies to non-resident, non-citizen individuals who own US situs assets at the time of death. In such cases, the available exemption is only $60,000, in sharp contrast to the substantially higher exemption available otherwise. Any value above this threshold may be subject to estate tax at progressive rates, typically ranging from 18% to 40%.
This exposure is frequently underestimated by Indian residents with US connections—whether through shares, ETFs, mutual funds, brokerage accounts, equity compensation from US employers, or US real estate.
The US and India do have a comprehensive income tax treaty (DTAA) for income taxes (to help avoid double taxation on income), but this treaty does not extend to or govern the effect of transfer taxes on the citizens and residents of either or both of the countries.
With timely and well-structured planning, US estate tax exposure can often be substantially mitigated, sparing families from unforeseen tax burdens and cross-border compliance challenges at an already difficult time.
Rohit Jain, managing partner, Keshav Singhania, head-private client, Singhania & Co.
