NRIs can readily engage in the Indian capital markets after obtaining their PAN and eKYC. They can invest in stocks, mutual funds, and national pension plans, among other things. Aside from that, they invest in real estate and fixed deposits through NRE, NRO, and FCNR accounts.
However, it’s crucial to understand the tax consequences of such investments.
Fixed deposit investments are subject to a tax:
Fixed deposit interest earned from the NRO account is taxed. Rent, dividends, pensions, interest, and other income received in India may be deposited in the NRO account.
TDS of 30% will be applied to the interest earned. There is no limit to the amount of money that can be deducted as a tax deduction. TDS is deductible, for example, if a resident Indian’s interest on fixed deposits reaches Rs 40,000 in a given year. There is no such restriction for NRIs for the interest generated on fixed deposits from the NRO account.
Capital gains on listed equity shares or units of equities-oriented mutual funds are subject to capital gains tax. Long-term and short-term capital gains are the two types of capital gains tax on listed equity shares or units of equities-oriented mutual funds.
The capital gains are deemed short-term capital gains if the investment in equity shares or mutual funds is kept for less than a year. Short-term capital gains are taxed at 15% and subject to TDS at the same rates as long-term capital gains.
Otherwise, assets held for more than 12 months are considered long-term capital gains, and long-term capital gains over Rs 1 lakh are taxed at 10%. Long-term capital gains will also be subject to a 10% TDS deduction.
Capital gains taxes on debt mutual funds:
If a debt mutual fund investment is kept for less than 36 months, it is considered a short-term capital gain and is taxed at the standard tax bracket rates. On the other hand, TDS on short-term capital gains on debt mutual funds will be deducted at a rate of 30%.
If the assets are kept for more than 36 months, they are classified as long-term capital gains and are subject to a 20% tax rate, as does the TDS.
Tax on unlisted stock sales:
If you invest in unlisted shares for less than two years, your capital gains will be deemed short-term and taxed at the standard income tax bracket rates. On the other hand, TDS on short-term capital gains on unlisted shares would be deducted at the maximum slab rate of 30%.
If the unlisted shares are sold after two years, they will be treated as long-term capital gains and will be taxed at a rate of 20% with indexation advantages.
Tax on the acquisition or sale of real estate:
When an NRI buys a property from an Indian resident, the NRI is obligated to deduct 1% TDS on the payments made to the property seller if the purchase price is Rs 50 lakh or higher.
If an NRI sells property in India, they must pay a 20% tax on long-term capital gains (property held by NRI for more than two years). Tax should be paid at standard tax slab rates on short-term capital gains (property owned by NRI for less than two years).
If there is a long-term capital gain, the property buyer must deduct TDS at a rate of 20% (plus cess and any fee for LTCG). Otherwise, for short-term capital gains on property sale, the NRI shall deduct TDS at 30% (plus cess and appropriate surcharge for STCG).
Agreement to Avoid Double Taxation (DTAA):
The DTAA is beneficial to NRIs. Where the Indian government has reached an agreement with the taxpayer’s (NRIs) home country, the NRIs can pay taxes following the agreement. According to the DTAA agreement, they can pay tax in both countries and claim tax relief from the nation of their residence, or they can pay tax in both countries and claim tax relief from the country of their residency.
