ETMarkets Smart Talk | Equity, mutual funds, bonds or property: Tax rules every NRI should know: Ritu Shaktawat

Q) What are the key tax considerations NRIs should keep in mind before investing in India?

A) Before investing in India, NRIs should undertake a holistic review of the applicable tax and regulatory framework, including the following key considerations, to optimise their post-tax returns and ensure compliance with Indian laws.

1. Determining their residential status: Tax residential status of individuals is categorised into three categories: Non-resident (“NR”), Resident but not ordinarily resident (“RNOR”), and ordinarily resident (“ROR”) and it depends on physical presence in India on a year-on-year basis. The distinction is important as scope of income taxable in India differs for each category. Accordingly, NRIs investing in India or holding any India assets are advised to determine their residential status including for the years in which they expect returns from their India assets, as it forms the foundation for evaluating the taxability of their income and the overall tax implications of their investments in India.

2. Evaluating the applicable Double Taxation Avoidance Agreements (“DTAA”): NRIs who are non-residents of India for tax purposes should review the applicable DTAAs, between India and their country of residence. The applicable DTAA may provide beneficial tax treatment for certain income streams earned from India such as interest, dividends, capital gains, subject to meeting the prescribed eligibility and documentation requirements.

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3. Understanding the tax implications of the chosen asset class: The tax treatment varies significantly across investments such as equity shares, mutual funds, debt instruments, fixed deposits, and immovable property. Investors should evaluate the applicable tax rates, valuation norms, holding period requirements, exemptions and withholding tax implications before making an investment.4. Consider repatriation and FEMA (foreign exchange) requirements: Apart from tax considerations, NRIs should ensure that investments are made through the appropriate banking channels and in compliance with the applicable FEMA and RBI regulations to facilitate smooth repatriation of income and sale proceeds.

5. Maintain adequate documentation: Investors should preserve records relating to the acquisition date and cost, valuation reports (where applicable), tax paid or deducted at source (“TDS”), and DTAA related documentation, including a valid Tax Residency Certificate (“TRC”), to facilitate tax compliance and claim DTAA benefits, foreign tax credits, and minimise potential disputes with the tax authorities.

6. Review and meet tax compliance requirements: NRIs should assess their annual tax compliance obligations, including filing income-tax returns in India, reporting India-sourced income, claiming credit for TDS where applicable, withholding tax compliances (as may be applicable) and disclosing such income and taxes paid in India as well as in their country of residence, wherever required.

Q) Has the tax treatment of NRI investments changed significantly over the past few years?
A) While the fundamental principles governing the taxation of NRI investments have largely remained unchanged, the past few years have witnessed several legislative amendments aimed at rationalising the tax regime, simplifying compliance and addressing practical challenges faced by investors. Some of the key developments are as follows:

1. Changes to capital gains taxation: The Finance (No. 2) Act, 2024 rationalized the capital gains tax regime by revising tax rates and holding periods across various asset classes. The taxation of listed securities, mutual funds and immovable property has undergone significant changes, requiring NRIs to reassess the post-tax returns on their investments.

2. Taxation of debt and hybrid mutual funds: The tax regime for debt-oriented and certain hybrid mutual funds has been substantially modified, with specified mutual funds acquired on or after 1 April 2023, no longer enjoy the traditional long-term capital gains benefits.

Q) How can NRIs avoid common tax mistakes while investing in Indian financial assets?
A) NRIs can avoid common tax mistakes while investing in Indian financial assets by adopting a proactive approach to tax and regulatory compliance and investment monitoring. Some practical considerations include:

1. Don’t treat TDS as the final tax: TDS is only a collection mechanism and may not represent the final tax liability of the taxpayer. NRIs should assess whether in the tax returns to be filed in India any refund of taxes withheld should be claimed, any additional income should be reported, any DTAA benefits should be claimed etc.

2. DTAA benefits: Where eligible, NRIs should furnish the prescribed documentation, including a valid TRC and Form 41 (erstwhile Form 10F), before the payment is due to ensure correct treaty withholding rate is applied and avoid unnecessary refund claims.

3. Plan the timing of exits: The timing of a transfer or redemption can significantly influence the tax liability, particularly where the applicable tax rate depends on the period of holding of the asset.

4. Mode of investment: Prior to investments in India, various investment modes should be evaluated in detail including tax costs of holding and disposing the investment.]

Q) How do Double Taxation Avoidance Agreements (DTAAs) help NRIs, and how should investors make the most of them?
A) DTAAs entered by India aim to eliminate double taxation of the same income through mechanisms such as foreign tax credit or exemptions. DTAAs also provide concessional withholding rates on certain income streams such as interest, rent, capital gains, dividends, and royalties. NRIs can rely on DTAA benefits for their India sourced income during the years they are non-residents of India.

To make the most of DTAAs, NRIs should evaluate the applicable DTAAs before structuring their investments, not only at the time of receiving income or making an exit. The tax treatment of dividends, capital gains on equity shares, mutual funds, and other income can differ significantly across different DTAAs which may materially affect the post tax returns.

To claim DTAA benefits, investors must obtain a TRC issued by the jurisdiction of tax residence, quote PAN, electronically file Form 41 relating to residency. If the applicable DTAA has any specific condition those should also be fulfilled.

Q) How are short-term and long-term capital gains taxed for NRIs investing in Indian equities and mutual funds?
A) As per the domestic tax laws, capital gains arising on the transfer of Indian securities are taxable in India, at the applicable tax rates depending on the nature of the asset and the period of holding as provided below:

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Q) How are equity, debt, and hybrid mutual funds taxed for NRIs?
A) For an equity oriented mutual fund (i.e., funds having more than 65% of their investments in equity shares of domestic companies), see comments above.

For Specified mutual funds (i.e funds having more than 65% of their investments in debt and money market instruments) acquired after 1 April 2023, any gains arising on transfer, redemption or maturity are deemed be short term capital gains and are taxable in the hands of the investors as per the applicable slab rate.

For hybrid mutual funds, the taxation depends on the composition of their underlying portfolio, particularly the proportion of investments in equity and debt.

Hybrid funds with > 65% equity are treated as equity-oriented mutual funds whereas funds with less than 65% of equity exposure are treated as specified mutual funds and taxed accordingly.

NRIs residing in jursidictions such as (Oman, Qatar, Singapore etc.), may be eligible to claim DTAA benefits on capital gains arising from transfer or redemption of mutual fund units as such gains may fall within the residuary clause of “Capital Gains” article, which allocates taxing rights exclusively to the country of residence of the taxpayer.

Since these jurisdictions generally do not levy capital gains tax, such gains may effectively remain tax free, subject to satisfaction of the applicable treaty conditions.]

Q) How are interest income and capital gains from bonds taxed for NRIs?
A) Interest income: Interest earned by NRIs on bonds is generally taxable in India and is ordinarily subject TDS. The applicable TDS rate may vary from 10% to applicable slab rates depending on the nature of the bond, and would be subject to the applicable Double Taxation Avoidance Agreement (DTAA) benefits where eligible.

Capital gains: The tax treatment on transfer or redemption of bonds varies depending on the nature of the bond. Capital gains arising on the redemption of Sovereign Gold Bonds (“SGBs”) on maturity (i.e., after the 8-year tenure) are exempt from tax. Additionally, any transfer of tax-free bonds issued by the Government are exempt from capital gains tax.]

Q) What are the tax implications of buying and selling property in India as an NRI?
A) On Purchase of property in India by an NRI

Where an NRI purchases an immovable property in India from a resident seller, the NRI is required to deduct TDS at 1% of the sale consideration, provided the sale consideration or stamp duty value, whichever is higher exceeds INR 50 lakh.

Where an NRI purchases an immovable property from a non-resident seller, the buyer will be required to deduct the tax payable by the seller at source and should obtain necessary declarations from the seller in this regard.

On sale of property in India by an NRI

The tax implications for an NRI selling a property in India depends on whether the asset is classified as a short-term capital asset or a long-term capital asset. Any property sold within 24 months of acquisition is treated as a short-term capital asset and the gains are taxable as short term capital gains at the applicable slab rates.

For long-term capital gains, the applicable tax rates depend on the date of acquisition

• If acquired prior to 23 July 2024: Effective tax rate of 23.92% (including surcharge and cess) with indexation or an effective tax rate of 14.95% (including surcharge and cess) without indexation, whichever is more beneficial
• If acquired post 23 July 2024: Effective tax rate of 14.95% (including surcharge and cess) without indexation.

Immovable property transactions are subject to minimum valuation requirements which should be complied with to avoid taxes payable by the buyer and seller on a deeming basis.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)