India has been a beneficiary of significant remittances, in fact in the calendar year 2020, India has received the highest remittance of $ 83 billion amongst all the nations, credit for these generous remittances is attributed to the contributions made by the bourgeoning and vibrant Indian diaspora thriving in different corners of the world.
While investing, NRIs need to be aware of taxation and repatriation convenience.
Taxation on Interest earned on investment made in fixed deposits
Taxation on Interest earned on investment made in fixed deposits from NRE account and interest earned on investment made in FCNR deposits are tax-free. However, interest earned on a savings account and a fixed deposit made from NRO account is taxable. NRIs based out of the Middle East and other developed nations like the US, Canada, UK, etc conventionally have always preferred investing in fixed deposits of the funds they remit as the interest rate has been attractive and tax-free.
NRIs have also been investing in capital markets through mutual funds, direct equity, PMS and insurance products. NRIs based out of the US and Canada have some restrictions on their investment in mutual funds, direct equities and PMS. NRIs based out of other countries can invest in mutual funds, direct equities, unlisted shares, Government securities, debentures and insurance products either on a repatriation or non-repatriation basis.
The tax rate is based on the type of instruments and the holding period of these instruments.
The tax liability on capital gains of financial assets can be categorised as follows:
1. Short term and long-term capital gains tax on listed equity shares and equity mutual funds
The units of equity mutual funds and listed equities that are held for more than 1 year come under long-term capital gains. The investment in mutual funds and listed equity shares that are sold less than a year comes under short-term capital gains tax and is taxed at 15%. The investment in mutual funds and listed equities that are sold after a year comes under long-term capital gains. Long-term capital gains tax of 10% is levied on capital gains from the sale of mutual fund units and listed equity shares if the gains from these assets together or in isolation is more than Rs 1 lakh of gains in a given financial year.
2. Short term and long-term capital gains tax on debt mutual funds
The investment in debt mutual funds which are sold less than 3 years will come under short term capital gains tax on debt and therefore gains will be taxed as per income tax slab of the assesses and the investment in debt mutual funds which are sold after 3 years will come under long term capital gains tax on debt and the gains will be taxed at 20% with indexation benefits or gains will be taxed at 10% without indexation benefits.
3. Short term and long-term capital gains on unlisted shares
NRIs can invest in unlisted shares on a non-repatriation basis, NRIs also can buy shares on a repatriation basis in which case the transaction must be reported to RBI. The capital gains on investment in unlisted shares will be considered short-term if these unlisted shares are sold within 2 years and gains will be taxed at a marginal tax rate of the assesses. The capital gains on unlisted shares will be considered long-term if these shares are sold after 2 years and gains will be taxed at 20% with indexation benefits. For short-term capital gains on unlisted securities, there will be a tax deducted at the source at the highest slab rate of 30%.
NRIs can take benefit of the double taxation avoidance agreement act if the Government of India has an agreement with the country of his residence. As per the agreement, the NRIs can pay tax in either of the countries or can pay tax in both the countries and claim tax relief from the country of their residence.