Are you an NRI who invests in the Indian share market, if yes, you should be aware of how are NRI taxed on investment in India. This article will serve as a guide for NRIs to know whether NRI investment in India is subject to TDS or not, do NRIs have to pay capital gain tax, and what is the rate of capital gain taxation on investment in different asset classes be it equity, mutual fund investment, and F&O segment.
Taxation on NRI Investment
As per section 6 of Income Tax Act 1961, any person who is an Indian citizen but resides overseas is called a non-resident Indian. NRI can trade or invest in the Indian share market by opening an NRI trading and demat account with any stock broker. Non-residents can invest in Indian companies listed on BSE and NSE, or mutual funds, and also trade in equity futures & options (using NRO account).
Likewise residents, NRIs also have to pay taxes on the income earned or accrued in India. For instance, all profits earned on an investment in shares, derivatives, NCDs, mutual funds, etc. by non-residents is taxable in India.
Capital Gain on NRI Investment in India
Any profit earned by an NRI on sell of investment in shares, mutual funds, and other securities are called capital gain. Capital gain is further classified as short-term capital gain or long-term capital gain, depending upon the tenure or period, for which an investment is held by NRI.
| Listed shares (Equity investment) or Equity-oriented mutual funds | Debt mutual funds | |
|---|---|---|
| Short-term capital gain | If an NRI held investment in shares or units of equity mutual fund schemes for a period upto 1 year or 12 months, the profit on sale of such securities will be considered as short-term capital gain (STCG). | For debt-oriented mutual funds schemes, if an NRI receives profits by selling securities within 36 months or 3 years, the gains accrued is termed as short-term capital gain (STCG). |
| Long-term capital gain | If an NRI investor dispose investment in shares and equity mutual funds after an investment horizon of 1 year, profits or gain received is called long-term capital gain. | Profit on sale of debt-oriented mutual fund schemes after 3 years from the day of acquisition, is called long-term capital gain. |
NRI Capital Gain Taxation on Equity Investment
Likewise Indian residents, NRIs also have to pay capital gain taxes on profits earned by selling investments in securities like shares, mutual funds, etc. NRIs short-term and long-term capital gain tax rates are different.
- Short-term capital gain tax: NRIs have to pay 20% tax on all the short-term capital gains received from the sell of equity investment.
- Long-term capital gain tax: All long-term profits on sale of listed shares over 12 months, are taxed at the rate of 12.5%.
Note: 12.5% LTCG tax is only applicable if the long-term capital gain is above the threshold limit of Rs 1,25,000. Likewise residents, NRIs also enjoy tax exemption on gains upto Rs 1.25 lakh.
NRI TDS Calculation on Equity Investment
If an NRI has purchased 500 shares of a company at Rs 1200 per share and sells all of the invested shares for Rs 1500 within 12 months.
Here period of holding is less than 1 year, so all the profits will be short-term capital gain. Here, is the TDS calculation;
STCG = Selling price - Cost of acquisition
= (1500*500) – (1200*500)
= Rs 1,50,000
STCG tax on equity investment is 20%, so here, the TDS deduction will be at 20% of Rs 150,000 = Rs 30,000.
Now, assuming that if NRI sells its shares after 1 year at Rs 2,000 price so the TDS on the long-term capital gain will be;
LTCG = Selling price – cost of acquisition
= (2,000*500) – (1200*500)
= 4,00,000
As the long-term capital gain is higher than the exemption limit of Rs 1,25,000, the remaining LTCG of Rs 2,75,000 will be taxed at 12.5%. Thus, the banker will deduct Rs 34,375 (12.5% of Rs 3,00,000) and credit the remaining profit to the NRI bank account.
Points to note;
- NRIs have to provide contract notes or required documents as proof of the cost of acquisition. If an NRI has opened a PIS account then no document is required because all the transactions routed through PIS account are reported to RBI.
- For Non-PIS NRO trading accounts, document submission is important by NRI, if not, then TDS will be deducted at a maximum rate of 15%, and that too on the total selling price rather than the capital gain or profit received.
- In the above scenario, suppose, if NRI has a non-PIS account and documents are not submitted by him, then LTCG will be 15% of the total selling price worth Rs 10,00,000 which equals to Rs 150,000.
NRI Taxation on Mutual Fund Investment
Mutual fund is a popular investment avenue not just among residents but also for NRIs. As an NRI, you can invest in any equity, debt, hybrid, or ELSS categories of mutual fund schemes using your NRO non-PIS account. Thus, getting PIS approval from RBI authorized bank is not required for NRIs to invest in mutual funds in India.
| Types of mutual funds | STCG tax rate | LTCG tax rate |
|---|---|---|
| Equity-oriented mutual funds (Large cap, mid cap, multi cap, small cap, Hybrid mutual funds, etc.) |
Capital gain from sell of units of domestic equity mutual fund schemes within 1 year, is taxed at 15%. | NRIs are taxed at 10% long-term capital gain tax on sell of equity oriented schemes. |
| Debt-oriented mutual funds (Short duration fund, Medium duration fund, long duration fund, etc.) |
Short-term capital gain derived on sell of debt-oriented mutual funds within 3 years, is taxed at the rate of 30%. | NRIs have to pay 20% tax with indexation on long-term capital gain from debt-oriented mutual fund schemes. NRIs also have the option to pay LTCG tax on debt funds at 10% without indexation benefits. |
Note: NRIs get indexation benefits on long-term capital gain from debt mutual funds. The indexation adjusts the cost of acquisition or investment value to the current level taking into account inflation, that reduces overall long-term capital gain and thus, lowers your tax liability.
Below formula is used to calculate the Indexed cost of acquisition of debt schemes;
= (Cost of investment/cost inflation index of purchase year) * cost inflation index of the year of sale
Let’s assume that an NRI has invested Rs 200,000 in a debt scheme in 2016, and decides to redeem his investment at Rs 2,95,000 in 2022 at a net profit of Rs 95,000.
CII for the purchase year is 280 while in 2022, the CII value is 331. Thus, indexed cost of acquisition will be;
= Rs 2,00,000/280 * 331
= Rs 2,36,429
Capital gain = Redemption value – Indexed cost of debt acquisition
= Rs (2,95,000 – 2,36,429)
= Rs 58,571
This is subject to 20% LTCG TDS deduction which comes to Rs 11,714.
Alternatively, an NRI can also opt for no indexation benefit and pay TDS at 10% of total gains worth Rs 95,000. In that case, NRI’s tax liability will be Rs 9,500.
TDS on NRI investment in IDCW Mutual Fund Plans
If you are investing in mutual funds, you might have heard about two options; growth option and dividend option (IDCW). In the former, mutual fund companies reinvest dividends received while in the IDCW or Income Distribution cum Capital Withdrawal option, the dividend is distributed among mutual fund unitholders.
Profits received from selling IDCW mutual fund schemes are subject to a 20% TDS deduction and the remaining amount will be credited to the NRI bank account.
NRI Tax implications on Derivative trading
NRIs can trade in equity F&O using non-PIS NRO trading accounts only on a non-repatriation basis.
The tax slab of TDS on profits derived from NRI derivative trading in a calendar month is fixed at 30%. Apart from this, a 3% service charge is also applicable. Thus, all gains received by an NRI on equity F&O trading are taxed at 30.90%.
Taxation on NRI Dividend Income
Is the dividend income of NRI taxable? The answer is “Yes”.
An NRI shareholder who receives dividend income on capital invested in Indian companies is taxed at 20% plus applicable surcharge and 4% health and education cess.
Here, NRIs have the benefit of the Double Taxation Avoidance Agreement (DTAA) treaty to avoid double taxation of dividend receipts or pay tax at a lower rate.
A listed company in India that distributes dividends to NRI shareholders, will withhold either 20% tax or tax rate under the DTAA whichever is lower. Here, to get the lower tax rate benefit under DTAA, non-resident has to furnish a tax residency certificate of the other country.
Tax treatment of NRE or NRO Interest Income
NRIs can invest in India by opening either NRE (repatriation basis) or NRO bank account (non-repatriation basis). Both have different rules & regulations regarding TDS implications.
All the interest income earned on non-resident ordinary (NRO) accounts is taxable in India. Interest received on the NRO account is subject to 30% TDS plus applicable education cess and surcharge. Thus, the bank will deduct 31.2% TDS on NRI NRO account interest and credit the remaining balance to the NRI account. NRI can get the TDS credit by filling income Tax Return in India.
However, if an NRI chooses to invest in India on a repatriation basis, there will be no TDS on interest earned on NRE or FCNR account. Thus, all the interest earned on NRE account is tax-free or tax exempted in India.
Tax Benefits to NRIs in India
Investment in mutual funds by non-resident Indians has certain tax benefits too. Here are the details of tax benefits available to NRIs;
- Double Taxation Avoidance Agreement (DTAA): To avoid the double taxation of Income earned by NRIs in India and in the home country, a DTAA agreement is signed between the two countries. Under DTAA, all the income or capital gains on NRI investment in India is taxed only in one country.
- If the rate of TDS deduction is higher and NRI belongs to a lower tax slab, they can claim tax credit or refund when filing Income Tax Return. To claim for tax credit, NRI has to provide certain documents like self-declaration forms to the relevant authority.
- NRIs can avail of tax benefit of a maximum of Rs 150,000 on investment in equity-linked tax-saving mutual fund schemes (ELSS).
Final thoughts
NRI investment in different investment instruments be it shares, F&O contracts, or mutual funds are taxable in India at different tax rates. Not just the investment but also interest received on the NRO account is taxable while NRE account interest is tax-free.
However, as tax deducted at source on NRI investment in India, therefore, if an NRI falls in lower tax bracket, then he has the right to claim for excess tax credit at the time of filing Income Tax Return.
