In order to make tax compliance easier for non resident Indians (NRIs), Income tax laws have special provisions for taxation of investment income for NRIs. Let us discuss.
Applicability
These optional provisions are applicable to income of individuals who are either NRI citizens or Person of Indian Origin (PIO). An Individual is treated as PIO if he/she or either of his/her parents or grandparents were born in undivided India. For our discussion we will refer both as NRIs.
These provisions are applicable in respect of investment income and Long Term Capital Gains (LTCG) earned by NRI on specified assets in India in foreign currency. Specified assets include shares of all Indian companies, debentures or deposits with any company other than a private limited and central government securities. Please note, these provisions apply only for investments made by the NRI himself/herself. So the asset acquired by an NRI by way of gift or inheritance are outside the scope of this scheme.
Special benefits
First, an NRI is entitled to claim exemption in respect of LTCG earned by him/her on the specified assets by investing the sale consideration in these specified assets within six months from the date of sale of the original assets. The exemption available gets reduced proportionately in case full consideration is not invested. It is interesting to note that no similar exemption is available to resident taxpayer in respect of LTCG on any financial assets by reinvesting in any other financial asset which is available to an NRI in case of specified assets. This option of claiming exemption on LTCG by reinvesting makes this scheme very attractive for an NRI. The newly-acquired specified assets have to be retained for a minimum of three years, failing which the LTCG exemption availed earlier gets reversed in the year in which the newly-acquired specified assets are transferred/sold. Such reversed LTCG are then taxed as LTCG in the year of transfer of the new specified assets.
Second, an NRI is exempted from filing his/her Income Tax return (ITR) in India provided his/her income comprises only of the nature of investment income and LTCG on these specified assets and proper tax has been deducted at source on such income. Please note these conditions are applicable for claiming exemption from filing of ITR and not for availing benefits under this scheme.
Third, an NRI can continue to avail the benefits under this scheme even after becoming a resident under tax laws till he/she transfers or converts these specified assets into cash.
Manner of LTCG computation
The holding period requirement and the manner of computation of capital gains are similar to those applicable for resident taxpayers except for computing LTCG for investments made in shares and debentures of Indian companies through foreign currency. For investments made in shares and debentures of Indian companies by an NRI, the LTCG are computed without indexation. However, such LTCG are to be computed by converting the cost of acquisition as well as the sale consideration in the same foreign currency in which investment was purchased. The profits computed in foreign currency are then to be converted into Indian rupees to arrive at taxable LTCG.
Tax payable for different assets
LTCG on these specified assets are taxed at a flat rate of 10 per cent. The investment income from these specified assets and other LTCG are taxed at a flat rate of 20 per cent. Deduction under Chapter VIA is also not available to an NRI against LTCG and investment income. However, the NRI is eligible to claim deductions under chapter VIA against other income except the income on which tax at flat rate is applicable. Other income are taxed at regular slab rates.
The author is a tax and investments expert and can be reached on jainbalwant@gmail.com