Income tax

Tax rules for NRIs investing in stocks and mutual funds in India

My son is an NRI. It invests in listed stocks and equity mutual funds in India. I would like to know if this income is taxable in India. As far as I know the interest for the NRI is not taxable, but I have no idea whether the dividends are taxable or not. Is he entitled to the exemption limit of ??2.50,000 as Indian residents?

A non-resident is liable for tax in India only on his Indian income. All interest income earned by an NRI is not tax exempt in India. Although interest earned by a non-resident on NRE and FCNR accounts is fully tax exempt, other interest income such as interest on NRO account is fully taxable in India. Even the interest on the NRO account is subject to TDS without any threshold limit.

Dividend income as well as capital gains realized by your son from stocks listed in India and equity-focused mutual funds are taxable in India. Just like a resident taxpayer, a non-resident is also entitled to the basic exemption ceiling. In the event that income other than long-term capital gains of any kind and short-term capital gains on shares / mutual funds is less than the amount of the basic exemption, a resident has the right to offset this capital loss with long-term capital gains and short-term capital gains on equity products. The same possibility of compensating for the shortfall of the basic exemption limit is not available for a non-resident. He must therefore pay the full tax on these capital gains even if he has no other income or if this other income is below the taxable limits. A non-resident must pay a tax at the rate of 20% and an applicable surtax and tax on his dividend income. Dividend tax liability will only occur if its overall income excluding capital gains mentioned above exceeds the amount of the basic exemption limit.

While he may not have to pay dividend tax, he will still have to pay tax on any short-term capital gains realized on Indian stocks at a flat rate of 15%. Long-term capital gains on listed stocks and share programs will benefit from a basic exemption of one lakh on long-term capital gains on Indian stocks and beyond. one lakh he will have to pay @ 10% without any indexation benefit where on other long term capital gains he will have to pay a 20% flat tax. Please note that your son is not entitled to any deduction for various items in Chapter VIA, such as life insurance premium, medical insurance, mortgage repayment, NPS, ELSS, etc. capital gains of all kinds.

Balwant Jain is a tax and investment expert. He can be contacted on [email protected] and @jainbalwant his Twitter account

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