Income Tax Provisions Applicable to NRIs for Investment in Foreign Currency

Circumstances when these provisions shall apply

These provisions, which are optional, apply to income of non-resident Indian citizens or Persons of Indian Origin (PIO). A person is considered to be a PIO if he or his parents or grandparents were born in undivided India. We shall refer to both categories of persons 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 the shares of all Indian companies whether listed or not, private company or public limited company. Debentures or deposits made with all Indian companies except a Private Limited are also included in eligible investments. All securities issued by the Central Government are also eligible under these special provisions.

It may be noted that these provisions are applicable only if the investment is made by the NRI himself. So for property inherited or received as gift by 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 properties if he invests the sale consideration received for acquisition of any specified asset within six months from the date of sale. If the full return is not invested, the available discount will be reduced proportionately. Similar exemption is not available to resident taxpayer in respect of LTCG on financial assets by reinvesting in any other financial asset. This discount option makes this plan very attractive to an NRI. Newly acquired properties purchased to claim LTCG exemption must be maintained for a period of at least three years otherwise LTCG exemption is claimed and taxed as LTCG in the year of sale/transfer of newly acquired properties is applied.

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

An NRI is allowed to continue to receive benefits under the scheme even after becoming a resident under the tax laws, as long as he keeps these properties in his name.

How is LTCG calculated?

The requirement of holding period of these assets and the manner in which capital gains are to be computed are applicable to resident taxpayers, except in the manner of computation of LTCG for investments in shares and debentures of Indian companies denominated in foreign currency. For investments made by an NRI in shares and debentures of Indian companies in foreign currency, LTCG is calculated without giving the benefit of indexation. However, such LTCG is to be calculated by converting the cost of acquisition as well as sale consideration into the same foreign currency in which the investment was purchased. Profits calculated in foreign currency are converted into Indian Rupees to arrive at taxable LTCG. Foreign exchange gains made on such investments are effectively eliminated and only actual capital gains are taxed.

Taxes payable for various properties under these provisions

Under the scheme, LTCG on all these assets is taxed at a flat rate of 10%, 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 for NRIs against LTCG and investment income. However, NRIs are eligible to claim deduction under Chapter VIA against income other than those on which tax is applicable at flat rate. Other income is taxed at regular slab rates.

Balwant Jain is a Tax and Investment Specialist and can be contacted at jainbalwant@gmail.com

first article