RBI has liberalised the remittance scheme recently permitting resident Indian individuals to make investments up to $100,000 per financial year outside India for any permitted capital and current account transactions. This provides an opportunity for Indians to acquire, inter alia, immovable property,
shares/securities of foreign companies as well as units of overseas mutual funds. The acquisition of shares/rated bonds/fixed income securities of an overseas listed company, which owns more than 10% in any listed Indian company as on January 1 in the year of investment can be made without any limit. Let us discuss the tax implications of investments in foreign shares. TAX INCIDENCE An individual who qualifies as a resident (ordinarily resident ) of India is chargeable to tax on his worldwide income. In general, without going into exceptions, individuals residing in India over a period of two to three years qualify as resident (ordinarily resident) under the provisions of the Income-tax Act, 1961 (the Act). Thus, if you are a resident (ordinarily resident), all income accrued/ received from overseas is required to be reported to tax in India. Types of income and tax thereon Investment in shares typically yields two sources of income , capital gains and dividends .
While dividends received from shares of Indian companies are tax free in the hands of shareholders, it is not so as regards dividends declared by foreign companies . Dividends received from abroad are chargeable to tax in India in the hands of the investor at the normal rates of tax, based on the slab rate. The maximum marginal rate of tax for an individual with income over Rs 10 lakh is currently 33.99%. On sale of shares, capital gains arise if there is a profit (sale proceeds minus acquisition price). In India, the tax rate on capital gains will depend on whether the same are regarded as short-term or long-term capital gains. Overseas shares would be classified as short-term assets if these assets are held for not more than 12 months; assets held for more than 12 months would be regarded as long-term capital assets. Short-term capital gains are taxed at the normal rates applicable to the investor while long-term capital gains are chargeable to tax at the rate of 20% (excluding surcharge and cess) after claiming the benefits of indexation . USE OF TAX TREATIES In connection with income earned from abroad, it would be pertinent to note that India has entered into double tax avoidance agreements (DTAAs) or tax treaties with many countries with a view to avoiding tax being paid on the same income in two countries, once on receipt (in the foreign country) and then on repatriation (to India). However, tax treaties examine each income stream separately and differ from country to country. Therefore, if the specific income is taxable in the foreign country as well as in India, the tax treaty which India has with that country would need to be examined to determine whether double tax can be avoided or whether a tax credit can be claimed in India.
(Romil Ravani and Brenden Saldanha from Ernst & Young)
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