Income tax provisions applicable to foreign currency investment RDIs

Income tax laws have some special provisions to attract NRIs (Non-Resident Indians) to make foreign currency investments in India.

Situations when these provisions will apply

These provisions which are optional apply to the income of Non-Resident Indian Citizens or Person of Indian Origin (PIO). A person is treated as a PIO if he or one of his parents or grandparents were born in undivided India. We will refer to both categories of Individuals as Non-Resident Indians (NRIs).

These provisions apply to investment income and long-term capital gains (LTCG) of an NRI for certain specified investments where the money has come in foreign currency. These include shares of all Indian companies, whether listed or not, whether private companies or public limited companies. Bonds or deposits made with all Indian companies other than a private limited company are also included in eligible investments. All securities issued by the central government also qualify under these special provisions.

It may be noted that these provisions apply only if the investments are made by the IKR itself. So assets inherited or received as a gift from an NRI are out of this scheme.

Benefits under this scheme

An NRI can claim exemption in respect of Long Term Capital Gains (LTCG) on eligible assets if he invests the sale proceeds to purchase any of the specified assets within six months from the date of sale. The available exemption will be reduced proportionately if the full consideration is not invested. Similar exemption is not available to a resident taxpayer in respect of LTCG on financial assets reinvested in any other financial asset. This opt-out option makes this scheme very attractive to an NRI. Newly acquired assets to claim LTCG exemption must be held for a minimum period of three years, otherwise the LTCG exemption previously claimed is canceled and taxed as LTCG in the year of sale/transfer of the newly acquired assets.

An NRI availing of this scheme is exempted from filing his Income Tax Return (ITR) in India if his income consists of investment income and LTCG on such assets and due tax has been deducted at source on these income. It may be noted that these conditions apply only for exemption from filing ITR and not for availing benefits under this scheme. So, in case the NRI has any income other than investment income and LTCG on these assets, he can still avail the LTCG exemption but will have to file his ITR here in India.

The NRI is allowed to continue availing the benefits of this scheme even after he becomes resident under tax laws as long as he holds these assets in his name.

How should LTCG be calculated?

The holding period requirement of these assets and the manner in which the capital gains will be calculated are similar to those applicable to resident taxpayers except for the manner of calculation of LTCG on investments in shares and debentures of Indian companies made in foreign currency foreigner On investments made in shares and debentures of Indian companies by an NRI in foreign currency, LTCG is calculated without giving the benefit of indexation. However, such LTCG should be calculated by converting the purchase cost as well as the sale amount into the same foreign currency in which the investment was purchased. Earnings calculated in foreign currency are then converted into Indian Rupees to arrive at taxable LTCG. So effectively the foreign currency gains realized on such investments are eliminated and only the real capital gains are taxed.

Tax payable on various assets under these provisions

LTCG on all these assets is taxed at a flat rate of 10% under this scheme, while investment income from these assets and other LTCG is taxed at a flat rate of 20%. Deduction under Chapter VIA is also not available to an NRI against LTCG and investment income. However, the NRI is entitled to claim deduction under Chapter VIA against income other than income subject to flat rate tax. Other income is taxed at regular rates.

Balwant Jain is a tax and investment expert and can be reached at [email protected]

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