Foreign investments are taxed on the basis of residential status
The high growth of the Indian economy has presented varied investment opportunities in India. Nevertheless, high net worth individuals and the growing Indian middle-class are looking at foreign investments to diversify their portfolios. Under the liberalised remittance FEMA scheme, resident individuals are allowed to remit up to $200,000 (about rupee 90 lakh) per financial year for permitted current or capital account transactions.
INVESTMENT AVENUES The permissible investment avenues include investment in foreign securities, acquisition of immovable property outside India and deposits with banks outside India, subject to local laws of such countries.
TAXABILITY
Under the Income-Tax Act, 1961, the taxability of an individual is dependent on his residential status, which is determined on the basis of his physical presence (number of days) in India during the relevant financial year and, in certain cases, the preceding four years. A resident individual is subject to tax on his global income in India subject to the foreign tax credit on taxes paid outside India. As such, income from foreign investments would generally be liable to tax in India. In case of non-residents, such an income is not liable to tax as long as it is not directly received in India.
TAX IMPLICATION
FOREIGN INCOME: Investment overseas will generally fetch income in the form of dividends, interest, rental income from house property, and capital gains on liquidation of assets. Dividends, interest income and rental income from house property outside India would be taxable in India under the normal tax provisions. India has an extensive arrangement with about 80 countries for avoidance of double taxation, referred to as the Double Tax Avoidance Agreements (DTAAs) under which certain relief may be available.
The foreign tax credit paid in the source country shall be available as a deduction against the Indian income-tax liability of the individual, subject to some conditions. India gives unilateral tax credit to its residents in respect of foreign income even if there is no DTAA between India and the country concerned.
The taxability of capital gains is dependent on the period of holding of the foreign asset based on which an asset is classified as either long-term or shortterm capital asset. To qualify as long-term capital asset, the period of holding in case of shares of a foreign company should be over 12 months, whereas for other foreign securities and immovable property, the period of holding is over 36 months. The cost indexation benefit shall be available on such foreign assets. Short-term capital gains are taxable at 30% and long-term capital gains at 20%.
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