NRIs Taxation on Investments in India

It is tax filing season. Residents & NRIs both need to file for the FY 2023-24. Every taxpayer should determine their residential status under provisions of Section 6 of the Income Tax Act, 1961, for the relevant financial year for taxation. The resident rules are simple but what about NRIs who have earnings in India & abroad too? NRI Taxation on Investments made in India are too taxable in India under various sections.

Understanding the tax obligations for non-resident Indians (NRIs) taxation on Investments in India is essential, especially if you have income or assets in India. Let us today study these rules & try to help you navigate these tax requirements.

Before we start, the first rule is to determine if you qualify as NRI or not.

Determining Residential Status

Your tax responsibilities in India are significantly influenced by your residential status, defined under Section 6 of the Income Tax Act, 1961.

You can be classified as:

1. Resident
2. Non-Resident (NRI)
3. Resident but Not Ordinarily Resident (RNOR)

For NRIs, only the income received in India or that accrues/arises in India is subject to tax. So on your global income, you are not taxed in India but in your country of residence. So rules prevailing there will apply to your foreign income.

Types of Taxable Income for NRIs taxation on Investment in India

1. Salary: if you are an NRI and you’ve earned a salary for the services that you rendered in India, it shall be taxable in India.
2. Interest Income:
   • NRE (Non-Resident External) Account: Interest earned is fully exempt from tax.
   • FCNR (Foreign Currency Non-Resident) Account: Interest earned is also tax-free.
   • NRO (Non-Resident Ordinary) Account: Interest is fully taxable and subject to Tax Deducted at Source (TDS) without any threshold limit. So your bank would cut TDS and deposit with tax authorities.

3. Capital Gains:

• • • Long-Term Capital Gains (LTCG):
      • Listed Shares: Taxed at 10% (for gains exceeding Rs 1 lakh) plus surcharge and cess, with no indexation or foreign exchange fluctuation benefits.
      • Unlisted Shares: Taxed at 10% plus applicable surcharge and cess.
    • Short-Term Capital Gains (STCG):
      • Listed Shares: Taxed at 15% plus applicable surcharge and cess.
      • Unlisted Shares: Taxed at normal income tax slab rates.
    • Holding Period:
      • Listed Shares: Considered long-term if held for more than 12 months.
      • Unlisted Shares: Considered long-term if held for more than 24 months.

Double Taxation Avoidance Agreements (DTAAs)

India has agreements with many countries (around 90) to avoid double taxation. These treaties allow NRIs to claim relief or credit for taxes paid in India on income that is also taxable in their country of residence. This will avoid paying tax twice or double in amount. The tax credit from one country helps offset the already paid tax in another country that has signed the DTAA with India.

Special Tax Regime for NRI Investors

NRIs can opt for a special tax regime offering preferential rates for certain types of income. Key points include:

• The existing income tax regime was spruced up by making income of up to Rs 300,000 exempt from income tax, as opposed to Rs250,000 earlier. Additionally, with a rebate, now people earning up to Rs700000 need not pay any income tax. This new system was termed the ‘New Tax Regime’. But this rebate for income below Rs 700000 applies to residents only.

• House property income: Rental income from the house located in India is taxable for an NRI owner of the house property. The determination of the taxable house property income shall be on similar lines as the resident.

• Special Tax Rates:
  • Investment Income or Long-Term Capital Gains (Other than Specified Assets): Taxed at 20%.
  • Long-Term Capital Gains from Specified Foreign Exchange (FOREX) Assets (e.g., shares in Indian companies): Taxed at 10%.
• Restrictions:
  • No deductions under Chapter VI-A (e.g., Section 80C for investments).
  • No benefits to indexation.
  • No deductions for expenses or allowances in calculating investment income.
• Tax Return Exemption: You may not need to file a tax return if your total income consists only of:
  • Investment income from FOREX assets.

Long-term capital gains from FOREX assets, provided tax has been deducted at source.

• Claiming refund: If there has been tax deducted at source (TDS) on some investment made in the name of the individual he/ she would have to file the ITR to claim the refund.
• Carry-forward of losses: Income tax rules allow carry-forward losses to set them off against capital gains up to the next 8 years. But for this ITR in the relevant assessment year has to be filled.

Making an Informed Decision for NRIs Taxation on Investments in India

Deciding whether to opt for the special tax regime depends on your specific financial situation. Evaluate your overall income, potential tax savings, and the benefits or restrictions of the regime.

In summary, NRIs must stay informed about their tax obligations in India. You can effectively manage your tax liability with careful planning and an understanding of available options and exemptions.