It is wise to check tax compliances before you place big bets. If you’ve been living abroad but investing here, this is how you will be taxed.
India’s growing market potential has placed the country amongst the most attractive destinations to invest in, not only for those within the country but also for those living overseas. And while investing in India, can prove to be fruitful one has to watch out for tax obligations. In fact, how your investment will be taxed depends a lot on what’s your residential status, as well as the type of investment is.
For example, if you have just moved out of India and continue to hold the status of ‘resident’, then you will be taxed as per applicable rate based on your residency status for that financial year. Similarly, a Japanese citizen working in India for a stipulated number of days may come under the ambit of ‘tax resident’ status. And a person migrated to a foreign country for several years may become tax resident for certain financial year. So, taxability status of an individual depends on the number of days spent by an individual in India.
Let’s find out more about how those living abroad can invest in India but also be aware of their tax liabilities.
How Is Tax Residential Status Determined?
There are two conditions and either one is applicable to a person to be considered as Indian resident during a financial year. First is if he/she stays in India for 182 days or more during the financial year. The second condition is that person has stayed in India for 60 days in the previous year and lived for one complete year in last 4 years. The first condition is not applicable to Indian citizens who live abroad for work and crew on an Indian ship, whereas the second condition is not applicable on Person of Indian origin (PIO).
If the status of a person is ‘resident’ Indian, then all his/her income, whether from India or globally, would be taxable as per the applicable rates. If the status of the person is ‘NRI’, then only income earned and accrued in India will be considered for tax as per the applicable rate.
For example, if you are an NRI and invest in India in instruments like Debt Mutual Fund, real estate, Fixed Deposits and alike will be considered for tax incidence as all such incomes are earned or accrued within the territorial region of India. For NRIs, income earned from abroad are not taxable in India.
Tax Obligation On Income While Investing in India
While NRI’s earning interest income by investing their foreign earnings in NRE and FCNR account is not taxable in India, if they invest their income from India in an NRO account, then interest from such investment would be taxable at applicable rates.
Rented Out Property
Income earned by an NRI from his rented-out property in India would also be taxed as a normal resident. NRIs are, however, entitled to get deduction benefit under Sec 80 (C) like a resident Indian.
Sale of Property
As for real estate sales, NRIs who sell their property in India and earn an income on such transaction are subject to long-term capital gain (LTCG) or short-term capital gain (STCG) as the case may be. LTCG is taxed at 20% rate, whereas STCG is taxed at applicable income tax slab rate. For LTCG, the buyer of the property is required to deduct a TDS of 20%, whereas if it is STCG, then 30% TDS is required to be deducted upfront.
If NRIs want to avoid paying this LTCG tax from the sale of property, they can be investing the amount of capital gain under Section 54. NRIs can also get the tax deduction benefit u/s 54 F and 54 EC.
NRIs are also allowed to invest in the Indian equity and share market. Tax implication for equity return is similar to the normal resident but depends on the type of fund being equity or debt nature and the period of holding. Interest income from NCDs if received in the NRO account, then it is taxed as per the applicable rate but if such interest is received in the NRE account, then it is tax-free.
It is important to note here, that NRIs who have only income from investments in India and no other income. And TDS has been deducted on such investment income, they are expected to file a tax return.
Always remember that it is important to check tax implication in the foreign country where you have a resident status before investing. Also, you must further explore the double taxation agreement between India and the country where you live for further tax clarity. Always consult your tax advisor before investing as it will help you to understand the exact tax implication on your income.