NRI Income TAX rates & other Indian Taxation Laws for NRIs living abroad.

Capital Asset:

To define simply, capital asset is property (including shares, debentures, government securities, bonds, units of UTI and Mutual Fund, immovable property etc) of any kind held by an individual. The following however is not included in ‘capital asset’:

  • Personal items like electronic items, apparel, furniture etc
  • Agricultural land
  • Specified bonds like 6.5% Gold Bonds 1977, 7% Gold Bonds 1980, National Defence Gold Bonds 1980, Special Bearer Bonds 1991, Gold Deposit Bonds 1999

Capital Gain:

This is the profit or loss arising from the transfer of a capital asset.

Just as there are many kinds of capital assets, so also are there many kinds of capital gains.

Generally, capital gains are classified, based on the duration for which the asset is with the client, as long-term and short-term capital gain.

Short-term capital asset includes those assets sold within 36 months (1 ½ years) of its purchase. Long-term asset, on the other hand, re assets sold after 36 months (1 ½ years) from the date of purchase. Nevertheless, this ‘holding period’ criterion is relaxed to 12 months in case of the following:

  • Equity and preference shares, debentures or any other financial instrument listed on a recognized stock exchange in India
  • Units of UTI or any other Mutual Fund
  • Zero coupon bonds

Like other assets, long-term and short-term capital gains are also taxable. Please go through the given table to understand how tax is deducted.

Type of asset Rate of tax deduction at source (TDS) Exemption available (only for long term capital gains)
Long term Short term
A) Purchased in Indian Currency (RS.)
Equity share in listed companies and Securities Transaction Tax is paid Nil 10.2% (11.22% if the total income exceeds Rs.10 lakh) Not applicable (NA) as long term capital gain is fully exempt
Unit of equity oriented mutual fund Nil 10.2% (11.22% if the total income exceeds Rs.10 lakh) NA as long term capital gain is fully exempt
B) Purchased in Foreign Currency (other than Rs.)
– Indian Companies’ equity shares
– Debentures and deposits in Indian public companies
– Central Government securities
10.2% (11.22% if the total income exceeds Rs.10 lakh) 30.6% (33.99% if the total income exceeds Rs.10 lakh) Capital gains proportionate to the amount of net consideration which is reinvested in the specified assets in column 1 (see example 1)
C) Other Assets
(Assets not included in categories above) like house property, land and building, jewellery, development rights etc.
20.4%
(22.24% of the income exceeds Rs.10 lakh)
30.6% (33.99% if the total income exceeds Rs.10 lakh) If the amount of capital gains is invested in bonds of National Highways Authority of India (NHAI) or Rural Electrification Corporation, then the entire capital gains is exempt, else the proportionate gain is exempt. As per the financial budget 2007-08, a cap of Rs. 50 lakh has been imposed on capital gains from the sale of property. (See example 2)

Example 1: Supposing the net consideration from the sale of an asset is Rs.1 lakh. If s/he invests the entire amount, the entire amount is exempted from tax. But, if s/he invests, say Rs.90000, then 90% of the capital gain would be tax-free. Hence, how much of your capital gain is tax exempted depends on how much you invest. Please note that there is a cap of Rs.50 lakh on tax exemptions for long-term capital gains (read sale of property). This means that if, out of the Rs.1 lakh received, you invest less than Rs.50000, your investment would NOT be tax-free.

Example 2: If you invest all of your capital gain anew, then the entire capital gain is exempted. If you invest, say 50% of the capital gain, exemption is granted proportionately.

Filing Income Tax Returns in India:

If, as a non-resident, your income is ONLY from the long-term capital gains as mentioned in Column B, you do not have to file any tax. However, if you have other means of income, apart from those mentioned in Column B (like rent, salary, professional income or income from non-specified assets), you have to pay tax by the 31st of July.

Gains vs. Losses:

If a non-resident has incurred losses on the sale of a particular asset, and in the same financial year has profited from another sale of a particular asset, s/he can set off the loss against the gain, and avail of tax benefit on the gain. In this case, non-residents can apply for a tax exemption certificate prior to the sale of shares of the second lot where s/he has capital gains to ensure a set-off and apply for nil or lower deduction of tax.

Present Indian Stock Market Condition: Tips & Strategies to Invest

Research group at NriInvestIndia.com anticipates the markets too stay choppy in the coming weeks due to the whole nuclear deal skepticism, assuming the outcome to be in India’s favour. The markets are in a very tight range and there is not much selling or buying on any of the blue chip stock counters says the equity analyst Mr. Gaurav Sharma at NriInvestIndia.com. He adds, we are betting on the fact that the outcome would be in India’s favor, thus most of the clients are adding good power sector stocks in both Indian mutual funds and derivatives market.

The Indian stock market is definitely not in one direction, and building positions on both buy or short sides is not a fairly good idea to make money in such a tight market. Analysts believe that the market is definitely going to see some action as soon some breaking news come out, but the effect of such news on the Indian stock market would not be lasting long, and there could be a major pull back leading the market to touch the 13000 levels.

Having said that, economists believe that the inflation would inch down to 10% in the coming quarter that would become visible in retail and consumer durable products soon, which would in turn boost consumer confidence. This would definitely push the markets to bounce back from the 13000 levels, and we might see some fresh buying, and both sensex and nifty might witness some rally.

These levels could be of great importance for those domestic as well as NRI clients who did not get a chance to make investments into top Indian mutual funds when the market was trading at 18000 levels. A prudent idea would be to invest 25% of your savings at these levels, and when the market drops down 20% from here, another 40% of the savings can be invested.

Current market conditions are as such that its very hard to predict the direction of the market, thus it is vital important for both resident as well as non resident investors to act wisely and invest with a proper game plan. The whole idea is to do investing wisely and with common sense, and not forcing one self into rush and landing into unnecessarily diversification of funds into some unwanted financial instruments. For more ideas as to how to go about drafting a portfolio, one should consult a good investment adviser and leave the job of asset allocation to professionals.

Guide to Income TAX rules for Non Resident Indians on Investments

Since the time the Government of India began reviewing its policies, thus attracting more and more non-residents to invest in the Real Estate segment, the Reserve Bank of India, in its mid-term economic policy for the year 2006-07:

  • Removed the lock-in period for the sale proceeds of property credited to NRO Accounts with a cap of US$ 1 mn.
  • Permitted the full repatriation of income from the rented property after payment of tax.
  • Extended tax exemptions from wealth tax on commercial and residential property for at least 300 days in a calendar year.

To protect its non-residents from paying double tax, the Indian Government has entered into Double Tax Avoidance Agreement (DTAA) with several countries where Indians reside in large numbers. DTAA has provided for tax to be deducted at source out of payments for Non-Resident Indians (NRI) and Persons of Indian Origin (PIO) thus assisting the process of assessment of taxes due from them.

The Income Tax Act 1961 (ITA 1961) defines how an individual residing in India is to be taxed depending on his residential status. The residential status is classified as:

Resident: An individual who stays in India, for a minimum of 182 days in a year ending 31st March; or for at least 60 days in a financial year ending 31st March; AND a total of 365 days in the preceding four years. This period of 60 days is extended to 182 days in case of –

  1. Indian Citizens who leave India for employment outside India
  2. Indian Citizens who are crew members of an Indian Ship
  3. Indian Citizen or PIO visiting India in any year

Ordinarily Resident (ROR): An individual, who is resident and ordinarily Indian, is taxed on the income she/he receives from India or is deemed to receive from the same in the relevant financial year.

[Note: For individuals in the two above-mentioned categories, global income is taxable in India]

Resident but Not Ordinarily Resident (RNOR): A RNOR is an individual who does not reside in India in nine out of ten years before the previous year, or a person who is residing in India for 729 days or less during the last seven years before the previous year. A RNOR is taxed on income accruing in India. S/he is not taxed on income generated from OUTSIDE India.

Non-Resident: Any individual who does not fall in the above-mentioned category is a Non-Resident (NRI). Such an individual is taxed on income received (or deemed to receive) or accruing (or deemed to accrue) from India in the relevant financial year.

Current Income Tax & Investment Taxation for Non Resident Indians

The recent economic boom being witnessed by India has resulted in the return of many non-residents. Upon return, non-residents need to pay certain amount as tax (as applicable). While the tax rules for non-residents are relatively simpler, we do get queries regarding the same. Hence this section is for all those of you having any query. We have tried to cover various aspects, but if you still have any doubt, please feel free to contact us.

To begin with, the status of a NRI for Income Tax purposes in India is given to those non-residents who are either a citizen of India or a Person of Indian Origin (PIO). A PIO is one whose parents or grand parents were born in undivided India.

A person who has been in India for sixty days or more, or for a total of 365 days or more in the preceding four financial years, qualifies for the status of ‘Resident’ Indian, but considering the fact that non-residents, while visiting their family/relatives in India may end up staying for a longer period, the sixty days time has been relaxed to 182 days. Please note that non-residents can continue to enjoy their NRI status if their stay in India is more than 60 days but less than 182 days, irrespective of whether their stay in India in the past four years adds up to 365 days or more, or not.

We are often asked if money earned outside India is taxable in India. As per rule, only that money can be taxed in India that is accrued from India. Money generated outside Indian Territory cannot be taxed in India. However any income earned on money brought into India subsequently will be subject to tax.

In addition, even after settling in India and losing one’s NRI status, the person may not be taxed in India IF:

  1. He has been in India for 729 days in the preceding seven financial years OR
  2. He has qualified as a NRI for nine out of ten preceding financial years.

In the same way if a non-resident’s stay in India exceeds 182 days, with the non-resident consequently losing his NRI status, her/his income will still not be taxable if any of the above mentioned two conditions are fulfilled. Her/his tax status will become that of a ‘Not Ordinarily Resident’.

Also, if either of the aforesaid criteria is fulfilled, wealth tax is also not applicable on assets held outside India.

The Indian Government has entered into DTAA (Double Taxation Advance Agreements) with various countries facilitating its non-residents lower tax rates and exemptions in addition to those available in the domestic tax clause.

If you are a NRI you can avail of a lot of benefits. To state a few:

  • Investments in Government Securities and/or Indian Companies in Foreign Exchange (FOREX) is taxable at lower rates
  • Special tax treatment given to shares purchased in any Indian Company and/or debentures in any Indian Public Company, and/or deposits with any public company and/or any security of the Central Government purchased in FOREX
  • 20% interest income taxable from the above mentioned investments
  • Long term capital gains on sale taxable at 10%
  • Sale of these investments is tax exempt if the sale proceeds are reinvested in the same medium within six months
  • If the sale proceeds reinvested partially, then proportionate tax exemption available
  • If tax withheld at source on the aforementioned schemes, no tax payable
  • If you do not wish to be governed by the special provisions mentioned in domestic tax law, you can give in writing the same along with your income returns

Have you acquired, in foreign currency, shares/debentures of an Indian company and are now pondering over elimination of foreign exchange fluctuation in computing capital gains? Well, you can stop thinking, as there is a special method for this.

In accordance with the prevailing rate of exchange, the purchase/sale prices are converted to FOREX. Capital gains, determined in FOREX, are converted to Indian Rupees as per the rate of exchange on the day of sale. However the benefit of indexation on account of inflation is not available in these cases.

We would like to mention here that while income earned on NRE Account is tax free, that earned on NRO Account is subject to tax deductions. If you plan to return to India, please do not forget to intimidate your Bank who will then convert your Account giving them ‘Resident’ status, and income henceforth earned will be taxable.

Lastly, you will need a Permanent Account Number before entering into any kind of financial deals (even if it limited to payment of tax) in India.