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Understanding the 40% IRS Estate Tax: Crucial for Indians with US Assets

Posted on 28 Aug 2024
Author: Sayan Sircar

Tags: Tax ; NRI ; International Investing

4 mins read
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This article explains the concept of US Estate taxes that might take out a large chunk of the portfolio of Indian and NRI investors due to tax on their US-based assets.

Understanding the 40% IRS Estate Tax: Crucial for Indians with US Assets

📚 Topics covered:

What is the 40% IRS Estate Tax rule that Indians should know?
What does the 40% IRS Estate Tax rule apply to?
Does the 40% IRS Estate Tax rule affect resident Indians investing via LRS?
Does the 40% IRS Estate Tax rule affect US NRIs now living in India?
Does the 40% IRS Estate Tax rule affect NRIs planning to return to India?

What is the 40% IRS Estate Tax rule that Indians should know?

The US income tax statutory body, the Internal Revenue Service (IRS), taxes 40% of the assets (called estate) of anyone holding US assets when they die. What this simplistically means is that:

you hold US assets like property, stocks, mutual funds, and retirement accounts and then you die
the IRS takes 40% above a threshold as estate tax
your heirs receive the rest

The threshold above which the 40% tax is triggered depends on the residency status:

US citizens and green card holders: The threshold is $13.61 million in 2024.
Non-resident Aliens (NRAs) including H1B: The threshold is $60,000 in 2024.
Indian residents holding assets like stocks via LRS: The threshold is $60,000 (~ ₹50 lakhs) in 2024.

40% tax is levied above this threshold amount.

Estate tax for USC or Green Card holder = 40% of (Estate value - $13.61 million)

Estate tax for NRA = 40% of (Estate value - $60,000)

The value of the asset or account at the time of death is used to calculate estate tax. The tax is of course not applicable if the Estate Value minus Threshold is a negative number.

What does the 40% IRS Estate Tax rule apply to?

Situs means the place to which, for purposes of legal jurisdiction or taxation, a property belongs.

The 40% IRS Estate Tax rule applies to US-situs assets.

Some examples are:

real estate physically located in the US like houses or condos
Shares of companies traded on US stock exchanges like GOOG on the NYSE
ETFs traded on US stock exchanges like QQQ on the Nasdaq
mutual funds domiciled in the US like VFIAX offered by Vanguard USA
retirement accounts like IRA, Roth, and 401k
investments like 529 plans (for college) or HSA for medical expenses
bank accounts in the US

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Does the 40% IRS Estate Tax rule affect resident Indians investing via LRS?

If you are a resident Indian, the 40% IRS Estate Tax rule applies to you if you have purchased assets like stocks (NVDA, TSLA, GOOG, AAPL etc.) or ETFs (VT, VTI, VOO etc.) or mutual funds in the US. These assets fulfil the US-situs rule.

For example, you hold ₹1 crore in a US-traded stock / ETF portfolio you purchased using RBI’s Liberalised Remittance Scheme (LRS).

Assuming the $/₹ rate is 85, $60,000 = ₹51 lakhs. The estate tax of 40% is applicable on ₹1 crore - ₹51 lakhs = ₹49 lakhs.

If you die today, your heirs will pay 40% tax on this ₹49 lakhs i.e. ₹19.6 lakhs, when the shares are transferred to them.

Non-US domiciled funds (e.g. UCITs and SICAV-type funds) are not covered by the 40% IRS Estate Tax rule.

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Does the 40% IRS Estate Tax rule affect US NRIs now living in India?

For erstwhile NRIs, who are no longer living in the US, the threshold of the 40% IRS Estate Tax rule depends on the visa/residency status:

if you held a Green Card or were a US citizen, the threshold is $13.61 million in 2024 for assets like IRAs, 401k, 529, HSA, brokerage accounts, and real estate
if you never had a Green Card or citizenship, for example, you stayed on H1B only, then the threshold is $60,000

Does the 40% IRS Estate Tax rule affect NRIs planning to return to India?

Here the same logic applies to NRIs planning to return depending on their residency status - unless you hold a Green Card or US citizen status, every dollar of assets above $60,000 will be subject to 40% estate tax.

We will cover the details applicable to NRIs planning to return to India in a future article.

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