What about Taxation for NRIs?

Written by Vidya Kumar

October 5, 2014

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Executive Summary: Bank deposit accounts (NRE, NRO, FCNR accounts), mutual funds, equity shares and real estate are some popular investment avenues for NRIs. The article discusses about the tax treatment for NRIs on income earned from these investments. 


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Non-Resident Indians or NRIs have different investment opportunities in India. But investing blindly without understanding the tax aspects of each investment is not financial prudence. Here are some top investment avenues for a NRI and the related tax treatment of each option.

Bank Accounts: Bank deposit accounts can either be NRE, NRO or FCNR accounts. NRE and NRO accounts can either be savings, current or term deposit accounts, while FCNR account is only a term deposit account. The interest rates on these accounts are specified by the bank and vary from one bank to another. The interest earned on NRE accounts is tax free in India and the amount in the account (principal and interest) can be fully repatriated. In the case of NRO accounts, the interest earned is taxed at 30%. One can repatriate upto USD 1 million from NRO per financial year, provided certain procedures are followed. The interest and principal earned on FCNR accounts are not taxable in India.

Mutual Funds: Mutual Funds are an attractive investment opportunity for NRIs, as they not only give a good mix of liquidity and returns, but also help them in participating in India’s long term growth story.  Income from mutual fund investments can either be in the form of dividends or capital gains. Capital gains can either be short term capital gains or long term capital gains. The tax treatment for each of these options is different.

  • Dividends are not taxable in the hands of the NRI. 

  • Dividend Distribution Tax: 



Nature of Scheme

Dividend Distribution Tax


Equity Schemes
Nil
Non Equity Oriented Schemes
 25 % + Surcharge + Cess

The mode of calculation of dividend for non equity oriented schemes will change from October 1, 2014, which will result in a lower dividend in the hands of the investor. While earlier, the DDT was paid on the income net of tax, now the DDT will be paid on the total distributable income.

  • Long Term Capital Gains


Nature of Scheme

Rate of Long Term Capital Gains Tax


Equity Schemes
Nil
Non Equity  Schemes
Listed schemes: 20% with Indexation + 10% Surcharge + 3% Cess
Unlisted schemes: 10% without Indexation + 10% Surcharge + 3% Cess

  • Short Term Capital Gains


Nature of Scheme

Rate of ShortTerm Capital Gains Tax


Equity Schemes
15%  + Surcharge + Cess
Non Equity  Schemes
30%  + Surcharge + Cess (Assuming the NRI investor is in the highest tax bracket)

The important thing to note in the case of mutual fund investment for NRIs is that the asset management company deducts Tax at source before distributing the income to the investor.  If the applicable tax liability is less than the TDS deducted the NRI investor will have to file for a tax refund.

  • TDS Rates


Nature of Scheme

TDS Rate


Equity Schemes
Long Term Capital Gains : Nil
ShortTerm Capital Gains : 15%  + Surcharge + Cess
Non Equity  Schemes
Long Term Capital Gains : 20%  + Surcharge + Cess
ShortTerm Capital Gains : 30%  + Surcharge + Cess

Equity Shares: Equity shares are riskier compared to mutual funds. A NRI cannot invest in equity shares directly. He will have to invest through an authorised dealer or bank for applying for a Portfolio Investment Scheme (PIS) account. The purchase and sale of shares is routed through this account. Income from equity shares investment can either be through dividends or capital gains. Dividends are tax free in the hands of the NRI. However, this is subject to a dividend distribution tax of 15%. Long Term Capital Gains are tax free if the transaction is subject to Securities Transaction Tax (STT). Short Term Capital Gains are taxed at a rate of 15% + Surcharge + Cess if the transaction is subject to STT. However, in other cases, the tax is at the respective slab rate.  

Real Estate: Real Estate has for long been a sweet spot for NRIs and is expected to continue to be so in the future as well. NRIs can invest in any immovable property other than agricultural land, farm house and plantation property. The NRI can take a home loan for the purpose of purchase of real estate and claim tax benefits on the principal components of the loan to the same extent as a resident.  There is no upper limit on claiming the tax benefits on the interest component. Here are some tax aspects:

  • Capital Gains on sale of property will be taxed depending on the period of possession. In case the property is sold three years after the purchase date, then long term capital gains are taxed at 20% along with indexation benefit. Long Term Capital Gains will be subject to a TDS of 20%. In case of short term capital gains, the gain is added with other income and taxed at your respective slab rate. In the case of Short Term Capital Gains, there is a 30% TDS on sale of property. 
  • NRIs can claim an exemption from Long Term Capital Gains tax if they invest in a residential property. In case the asset sold is a residential house, the amount to be reinvested should be equal to the capital gains amount. If the asset is other than a residential house, then the net sales consideration needs to be invested. In addition, the NRI can also invest in tax savings bonds of National Highways Authority of India or Rural Electrification Corporation to the extent of Capital Gains or Rs. 50 lakhs, whichever is lower. The above investments are subject to conditions. 
  • On rental income, a flat 30% deduction in respect of stamp duty, registration charges and municipal taxes paid during the year is available. 
  • When NRIs purchase immovable property worth more than Rs. 50 lakh, a withholding TDS of 1% needs to be paid. 


This article should not be construed as an advice or suggestion. Investors should consult a qualified chartered accountant to understand the prevalent tax rates and tax implications. This analysis is valid only on the date being published.                                        
The author can be reached at [email protected]                                                                                                                                                            

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