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NRI Investment Taxation and ITR

Tax Filing 13

As an NRI you may have various investments in India. Most investments can be divided into the following asset classes.

>  Debt                      (Deposits, Bonds, Accounts, Funds, Etc)

> Equity                   (Shares, Funds, Etc)

 >  Real Estate          (Residential, Commercial, Land, Etc)

> Commodities     (Gold, Silver, Rubber, Coal, Iron, Rice, Wheat, Etc)

>  Others                  (Antiques, Philately, Art, Etc)

However the most NRI’s hold the following investments/vehicles to park their funds:

 
 

General NRI investments in India

>  Bank Accounts

>  Fixed Deposits

>  Gold / Jewellery

>  Mutual Funds

>  Real Estate

 

 


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Each of these investment vehicles have their advantages and disadvantages and each of them provides a benefit to the NRI investor in terms of returns. The benefit in terms of each of the investments is:

Investment Instrument

Income Source

Income Source

Bank Accounts

Interest

 

Fixed Deposits

Interest

 

Gold / Jewellery

Capital Gains / Profit

 

Mutual Funds

Capital Gains / Profit

Dividend Income

Real Estate

Capital Gains / Profit

Rental Income

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Is this Income Taxable in India?

Bank Accounts: In general an NRI will hold a NRE account or an NRO account or both. The interest earned in an NRE account is Tax free in India. However the interest earned in an NRO account is taxable as per the normal rates of tax for that particular year. In the NRO account interest is received post a TDS (Tax Deducted at Source) from the Bank.  The base TDS rate for NRO account interest is 30% of the interest earned.

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Fixed Deposits: These can be placed as an NRE Deposit or an NRO Deposit or a FCNR Deposits in Banks. The interest earned in an NRE and a FCNR Fixed Deposit is Tax free. However the interest earned in the NRO fixed deposit is taxable as per the normal rates of tax applicable for that particular year. The interest from NRO fixed deposits is received after a TDS and the base rate for the TDS is 30% of the interest earned. However there are few Deposits which are special deposits which under DTAA, and the tax can be deducted at a lower rate depending on you primary country of residence for tax purpose.

Few investors invest in Deposits on a Cumulative basis, which is that the interest is not paid out to the depositor on a quarterly or yearly basis, but only at the maturity of the Deposit. If a deposit is placed for 2 years, then the interest will be paid to the depositor only after 2 years; however the interest gets added to the deposit’s principal on regular basis depending on the interest cumulating offer of the Bank. In general, even if this interest is not received by the depositor, as it has accrues and been deemed to be received, the tax, as applicable, is in the year of accumulation and not only at the end.

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Gold / Jewellery: Precious metals and stones are generally bought as Jewellery or also in its base form as biscuits or coins. Now you also have options of buying Gold and Silver in the DEMAT (Dematerialized) form from the commodity exchanges and in the ETF form (Exchange Traded Fund) from other exchanges in the country. Normally, the price and value of precious metal increase year on year and is a good bet against inflation. The realization of Income/Profit in this mode of investment happens when the asset is sold. For example, if you bought 100 gms of gold coins in 2007 for a cost of Rs 1,30,000 (assuming price of  gold in India was Rs 1300 per gm in 2007) and sold it in 2012 for Rs 3,00,000 (assuming price of gold in India was Rs 3000 per gm in 2012), then the profit is of Rs 1,70,000 which is called the Capital Gains. A Capital Gains Tax is applicable depending on the type of asset, the tenure of holding and the indexation applicable.

 

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Mutual Funds: Income from Mutual Funds can be of 2 types, a Capital Gain or from Dividend received. The Capital Gains is computed by deducting the Cost Price from the Sale Price.

Capital Gains = Sale Price – Cost Price

Hence suppose you invested Rs 1,00,000 in a Mutual Fund and after 2 years you sold the same for Rs 1,60,000 then the capital gains is Rs 60,000 (ie: Rs 1,60,000 – Rs 1,00,000).

There is a Capital Gains Tax applicable depending on the type of Mutual Fund (Debt / Equity / Overseas / Others), the duration for which the investment was held, the indexation applicable, where the tax rate can vary between NIL to a base rate of 30%.

Mutual Funds have various options of investments, like Growth, Dividend Reinvestment and Dividend Payout. The Dividend received by the investor is tax free in the hands of the investor as the tax is actually already deducted in a way, in terms of a Dividend Distribution Tax (DDT). Hence the investor does not need to pay tax on dividends received.

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Real Estate: There can be 2 ways in which you can have a monetary benefit by investing in a property. One is putting the property on rent, wherein you receive an amount on a monthly basis in general for allowing a tenant to use the property. This rental amount received is computed as per provisions of the Income Tax Act and the ‘income from House Property’ is determined which is taxable as per the normal rates of taxation. Often the tenant does a TDS, which can either be claimed back from the Income Tax Department post filing your tax returns or this tax deducted can be adjusted against any tax that is payable by you.

The 2nd method of monetary benefit is again Capital Gains, wherein you sell a property at a price which is higher than the price that you have purchased it for. The Capital Gains is taxed at 30% or 20% or at normal rates of taxation depending on the nature of the property and the tenure that you have held the property for. However, much care should be taken while computing CG from property sale as the amounts involved in a typical property transactions are large and any mis-interpretation or mis-calculation can have a large impact on your taxation and legal standing. It is best advisable to appoint a qualified and experienced consultant for the same, rather than to do it yourself (if you are not qualified and experienced in this field). There are ways and options to save the Capital Gains tax also which has been provided by the Income Tax Act. Moreover there is a CGAS (Capital Gains Account Scheme) which needs to be used for your Capital Gains.

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Do you need to declare this Income to the Income Tax Department or file Income Tax Returns?

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The tax implication has briefly been discussed and now we will discuss the compliance requirements for the various assets that are used for parking funds.

Bank Accounts: This is one of the most ignored asset class in terms of accounting and declaration of the interest income in the Income Tax Returns. Most individuals (Residents and NRI’s) and even their Tax Agents ignore the interest earned in the NRE account, assuming that it is tax free and hence does not need to be included in the IT Return. This is a complete fallacy. If the IT Department has provided a field for the same in the IT Return, it is definitely not for fun and not for ignoring. Yes, the interest earned in the NRE account is not taxable in India if you are maintaining your NRI status, however the same needs to be declared in the Income Tax Returns. The Government is not asking you to pay tax on the same, however if you are filing your IT Return without including the same, technically it can be call a defective return or also a concealment of income. Hence unknowingly, you can become a tax defaulter/evader.

Similarly, for interest income from NRO account, even though the tax has been deducted at source, that to at the highest tax slab, there is a requirement of declaring the interest and the tax deducted in the Income Tax Return. Often we see that the PAN Number of the account holder is not updated in the NRO account and hence it become difficult for the account holder to claim the benefit of the TDS. Most often, the TDS for the NRO account is refunded to the account holder when the account holder files the Income Tax Returns as in general the taxable income in India for the NRI is not at the highest tax slab.

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Fixed Deposits: Similar to Bank Accounts, the NRE FD’s interest also needs to be declared in the Income Tax Returns, however there will not be any tax payable if you have the NRI status.

The interest earned on the NRO FD also needs to be declared and if you file your tax returns, there is a probability of more than 80% of NRI tax filers to get a tax refund.

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Gold / Jewellery: If you have sold Gold or Jewellery you need to declare the same in the IT Return. If you are not declaring the same then this is contrary to law. With the provisions of indexation, the Capital Gains from the sale may not be taxable at all, however it needs to be declared in the Income Tax Return. Moreover, you should buy and sell through only authorized dealers and shops and maintain bills and receipts for the same for future scrutiny (if required).

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Mutual Funds: The dividend earned, although tax free needs to be declared in the IT Return. You need not pay any tax on the same; however the declaration needs to be made. There is a specific field for dividend income in the IT Return.

There is a TDS for any Capital Gains in Mutual Funds depending on the nature of investor and the type of fund. The Capital Gains TDS may be an appropriate tax liability for you or also may not. The transactions need to be accounted for the full fiscal year and then your appropriate tax liability computed and declared in the IT Return. It so happens, that often most investors definitely loose thousands and at times even laks of rupees due to non-accounting. As per me it make more sense to pay an accountant a couple of thousand rupees to take care of your compliance requirements if you can get a refund of a couple of extra thousands. This seems basic common sense. However, even if you don’t have a refund, even then you are off-course liable to declare these in your IT Returns.

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Real Estate: The increase or decrease in Property every year does not entail you to any Income Tax declaration or tax per se. However if your property is earning you a rental income, then the same must be declared in your annual IT Return. At times you may have to necessarily provide the details of your tenant also in the IT Return. In case the property is vacant then the annual let-able value needs to be declared and taxed appropriately.

Most important transactions are Property Purchase/Sale transactions for an NRI, as these include reasonable sums of monies. With the Government’s focus on cleaning the Real Estate market of un-accounted money, it is very important to be on the right side of the law and declare your transactions, as over a period of time the tax authorities will anyway have all the details. You are mandatorily required to declare property transactions in your IT Returns in general. There are numerous options that the Government has provided taxpayers to adjust Capital Gains and profit from sale of Real Estate and save on taxes, however the adjustments should be done with careful planning and intimated to the tax authorities to avoid any future penalties or notices.

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There is a legislated requirement of filing your Wealth tax Returns for specific properties and assets which may be more than a basic exempted gating. If you hold reasonable assets in India, it is advisable to appoint a tax consultant in India to take care of your tax matters and keep your books in order.

The calculations mentioned are only indicative and for illustrative use. Please consult a qualified tax advisor for specific computations. Hence this is a brief of the taxation and the compliance requirements on various transactions that most NRI’s generally make. All in all, you may not need to pay taxes in India, but you should file your tax returns year on year.

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