A non-resident Indian, similar to a resident taxpayer, is obligated to pay tax in India on their Indian income. Many NRIs possess income or assets in India, which may include bank deposits, shares of listed companies, immovable properties, jewellery, and business ventures. Consequently, the presence of such income or assets results in tax filing obligations and tax responsibilities in India.
It is important to note that while the interest earned by a non-resident on their NRE (Non-Resident External) and FCNR (Foreign Currency Non-Resident) accounts is entirely tax-free, other forms of interest such as the interest on NRO (Non-Resident Ordinary) accounts are fully taxable in India. Additionally, the interest on NRO accounts is subject to Tax Deducted at Source (TDS) without any threshold limit.
In India, the taxability of income differs based on the residential status of the taxpayer. As such, every taxpayers should determine their residential status in accordance with provisions of Section 6 of the Income Tax Act, 1961 (herein after referred to as ‘IT Act’) for the relevant financial year for the purpose of taxation.
Dr Suresh Surana, Founder, RSM India, shared the tax implications of investments made by NRIs would depend upon the nature of investments as follows:
> Capital Gains Taxation
NRIs are taxed on long term capital gains coming from the sale of listed shares and unlisted shares at 10% (in case of listed shares 10% tax would be applicable on gains exceeding Rs 1 lakh) plus applicable surcharge and cess without any indexation or foreign exchange fluctuation benefit.
Short-term capital gains on listed shares shall be taxed at 15% plus applicable surcharge and cess and in case of unlisted shares, the same would be taxed at applicable slab rates. The holding period for listed shares is 12 months to be considered as long term capital asset and for unlisted shares, it is 24 months.
India has Double Taxation Avoidance Agreements (DTAAs) with several countries to prevent double taxation for NRIs. Under these treaties, NRIs can claim relief or credit for taxes paid in India on income that is also taxable in their home country.
> Special Tax regime for NRI Investors
It is pertinent to note that there exists an optional tax regime wherein the income derived from certain specified foreign exchange (‘FOREX’) assets would be taxed at special rates subject to certain restrictions on availing certain deductions and tax benefits.
Every NRI could elect to be taxed as per the said optional tax regime wherein any income from investments or income from long term capital gains (other than specified asset) is taxed at 20% and income by way of long term capital gains of specified foreign exchange assets (such as shares in Indian company, etc) would be taxed @ 10%. Any other income derived by such non-resident would be subject to normal rate of tax.
However, any NRI availing the special tax regime needs to take the following aspects into consideration, such as:
a. Restrictions on availing certain deductions and exemptions
Certain benefits such as deduction benefit under Chapter VI-A as well as indexation benefit would not be available to such non-residents opting for special rates under this Chapter. Also, no deduction in respect of any expenditure or allowance shall be allowed in computing the investment income under this Chapter.
b. Exemption from furnishing the tax return
An NRI would not be liable to furnish his tax return under this Chapter if his total income consists only of the following incomes and tax has been deducted therefrom:
(i) Income from Investment in FOREX assets
(ii) Long term capital gains arising from FOREX assets