NRIs are Subject to Tax Deducted at Source on Capital Gains Swastika
NRIs are Subject to Tax Deducted at Source on Capital Gains

NRIs are Subject to Tax Deducted at Source on Capital Gains

India has been an attractive destination on investor’s RADAR including Non-Resident of India’s. One of the greatest reasons behind NRIs investment in India is its worldwide popularity.

Many NRIs nowadays seek India as the best place to invest. This is because Investments made by NRIs are treated as a foreign investment according to Indian foreign exchange regulations. Also, remittance and liberalized regulations, makes India one of the best places to invest in. 

According to the regulations laid by RBI, the Non-Resident Indian (NRI) are allowed to invest in the equity shares of both listed/unlisted Indian companies. The government permits NRIs to invest in multiple financial securities including listed NCD (Non-convertible bonds), stock market trading, government securities, debentures and more. 

Here is the list of popular investment options that are exercised by NRIs are discussed below:

Bank Deposits

There are three types of bank accounts that are opened by NRIs in India. These are:

Non-Resident Ordinary Rupee Account (NRO Account):

Non-Resident (External) Rupee Account Scheme (NRE Account)

Foreign Currency (Non-Resident) Account (Banks) Scheme (FCNR Account)

 

NRO account is specified to the cases where NRIs are allowed to book their investment only in the Indian sourced income such as rent, dividend, a pension earned in India. Under NRO accounts, remittance outside India is permitted to $1 million per year. Repatriation of the amount that exceeds $1 million requires prior approval from the Reserve Bank of India (RBI). 

NRE accounts are used by NRIs so that they can easily book their foreign earnings/savings in Indian rupees. The account is maintained in the form of current, savings, recurring or fixed deposit account and designated as Non-Resident Rupee Account. 

Foreign Currency (Non-Resident) Account (FCNR)

FCNR account is designated in foreign currency i.e funds in this account can be maintained in any permitted currency, which is freely convertible including US dollar, euro, Australian dollar, Japanese Yen. FCNR accounts provide ease of repatriation of funds and protection from foreign exchange rate fluctuations. 

Equity Investment

RBI allows NRI investors to invest in equity shares of Indian companies. Also, NRIs can do equity trading and invest in equity shares of both listed and not listed companies, depending on certain conditions, sectoral restrictions and other parameters. 

If NRI do investment in an unlisted company on a repatriation basis then the investment comes under foreign direct investment which is subjected to strict pricing norms, reporting requirements and sectoral restrictions. 

Note: NRIs can now also invest in equity shares through online stock trading method,

Mutual Funds

NRIs are allowed to purchase units of mutual funds irrespective of mutual fund type i.e equity-oriented or debt-oriented. The total return NRIs get from investing in mutual funds is available in the form of dividends, equity dividends. 

If the duration of redemption of equity-oriented mutual funds held for a period exceeding more than 12 months is known as long term capital gains. Also, long term capital tax is subject to tax at 10 per cent. While redemption for mutual fund units those held up for 12 months are known as short term capital gains and are taxable at 15 per cent. 

If we talk about debt oriented mutual funds, the holding period decided by the Indian government should be more than 36 months, taxable at 20 per cent. Whereas the mutual fund’s units held up for 36 months comes under short term capital gains and are taxable at applicable slab rates.

How are capital gains taxed for NRIs?

Long term Capital Gain on Sales of Equity Shares (Listed) or Equity Oriented Mutual Fund Units:

Long term instruments such as equity shares or equity-oriented mutual funds are those held for a period of 12 months.

For instance, equity shares or equity-oriented mutual funds come under long term capital gains and tax implications on the sales of these instruments shall be taxable at the rate of 10% if the gain on sale is more than 1.1 Lakh rupees. If the gain on sale is less than 1 lakh then the tax is exempted in such cases.

In equity-oriented mutual fund units, NRIs must be paid STT (Securities Transaction Tax) on sale and acquisition of equity shares units. Also, RBI doesn’t allow indexation benefits on the cost of acquisition. 

Long term Capital Gains on Other Assets

If unlisted shares excluding (debt mutual funds) are held for more than 24 months, are classified under long term capital gains assets. The tax liability of unlisted shares is mentioned as 10%. 

In terms of debt-oriented mutual funds, if the units are held for more than 36 months then they are defined as long term capital gain assets. The tax liability on debt-oriented mutual funds is 20% after indexation. 

Short Term Capital Gain on Equity Shares (Listed) or Equity Oriented Mutual Funds

If the listed equity shares or equity-oriented mutual funds are sold before 12 months of its acquisitions, then the gains are considered as short term capital gain and these gains are taxable at 15%. 

Short Term Capital Gain On Other Assets

For short term capital gain, the securities and shares holding period must be less than 24 months. The tax on short term capital gain is applicable as per the slab rate assigned to the non-resident. 

The debt oriented mutual funds are classified as short term if they are held for less than 36 months. However, the gain on such instruments is calculated based on the applicable tax slab rates. 

How Non-Resident Pays Tax on Capital Gains

Unlike Indian residents, NRIs are not allowed to get the basic benefits in health and education cess. It should be noted that any redemption made by a non-resident is subjected to tax deduction at the highest tax rates. The TDS applied for any short term capital gains on unlisted securities shall be at 30%. 

Relief from Double Taxation

If India has signed the Double Tax Avoidance Agreement (DTAA) with the country of NRI’s resident, then the NRI may feel some kind of relief. According to the treaty, the NRIs can pay tax in either of the countries or pay the taxes in both countries. 

As investments come under different schemes/options that could be based on both repatriable or non-repatriable basis, it is crucial to understand the difference between the two modes. 

Takeaway

The tax rates mentioned in this blog are exclusive of applicable surcharges. This should be taken into account to compute the actual rate of tax. Further, the NRIs can avail of the benefit of lower tax rates under the Double Tax Avoidance Agreement between India and the country of their residence. 

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