Many NRIs want to keep or grow their investments in India, especially with the country’s economy booming. Since income from these investments is earned in India, it’s subject to taxes here.
Now NRIs are taxed similarly to residents in many cases, but there are some differences. Here’s a quick look at popular investment options for NRIs and how they’re taxed in India:
Listed shares and equity mutual funds
- Long-term capital gains (LTCG): If you hold listed shares or equity mutual funds for more than one year, gains over ₹1.25 lakh are taxed at 12.5%.
- Short-term capital gains (STCG): For shares or equity MFs held less than a year, the gains are taxed at 20%.
Debt mutual funds: Funds with more than 65% allocation to debt instruments are classified as debt funds. They’re taxed as follows:
Fixed deposits: The interest earned on FDs will be taxable at slab rate. However, interest income is taxable only in the case of NRO accounts. For NRE and FCNR deposits, interest earned remains tax-free.
Real estate: For investments in properties,
- LTCG (holding period > 24 months) will be taxed at 12.5%.
- STCG (holding period < 24 months) will be taxed at slab rate.
For NRIs, TDS (tax deducted at source) is applicable on all such capital gains. This TDS can be claimed as a credit while filing the ITR and hence, will be adjusted against your total tax liability.
What is the PFIC rule?
For NRIs based out of US, the PFIC (Passive Foreign Investment Company) rule is applicable when they invest in foreign markets. This tax rule is set up to prevent American taxpayers from deferring or avoiding taxes on income from certain foreign investments.
If you’re a US resident investing in Indian markets, this rule will be applicable to you.
However, not all investments fall under this. For instance, your pension funds, provident funds, and direct equity investments in Indian companies are typically free from PFIC regulations. But, if you’re investing in Indian mutual funds, ETFs listed in India, or ULIPs, these do fall under PFIC.
Here’s how the PFIC rule impacts you:
- It treats any gains from foreign investments as ordinary income, meaning they’re taxed at higher rates.
- Even unrealized gains (gains you haven’t actually cashed out yet) can be taxed, so you might have to pay taxes before you withdraw your investments.
However, under the Double Taxation Avoidance Agreement (DTAA), you can claim a credit for taxes paid in India when filing your taxes in the US. This helps reduce your U.S. tax bill, making it a bit easier to manage taxes on cross-border investments.
For US-based NRIs investing in India through a PMS firm, the tax rates remain the same as mentioned above. Note that the PFIC rule shall apply here as well if the PMS account invests in Indian MFs or ETFs.
How can NRIs avoid double taxation?
If an NRI earns income in India, it is taxed by the Indian government. However, this income again needs to be reported and might also be taxable in the country where they reside.
However, India has DTAAs with numerous countries to help NRIs avoid paying tax twice on the same income. Here’s how DTAA works:
- Exemption method: Your income is taxed in only one country.
- Tax credit method: Your income is taxed in both countries, but you get a credit in your resident country for the tax paid in India.
I’ve only covered taxation for capital gains in this article. Here’s a detailed read on taxation for NRIs on all types of incomes: How is an NRI’s income taxed in India?