NRI Taxation in India (Stocks, Mutual Funds and Derivatives)

Published on Thursday, July 18, 2019 by Chittorgarh.com Team | Modified on Sunday, August 9, 2020

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NRI Taxation in India (Stocks, Mutual Funds and Derivatives)

Tax liabilities of NRI investors are somewhat similar to those of a resident investor but it also depends entirely on the laws of the country where the NRI is living. For NRIs the income which is earned or accrued in India is taxable in India. And that also includes income or profit earned from investments in shares, derivatives, mutual funds, NCDs and other securities in the stock exchanges.

For NRI Taxation, a Non-Resident Indian (NRI) is defined under section 6 of the Income Tax Act, 1961 as a person who is of Indian origin or Indian citizen, is considered an NRI if he is not a resident in India.

An individual whose total taxable Indian income exceeds ₹15 lakhs is considered to be a resident if the person:

  • visits India for a period of 120 days or more in the previous year and
  • has been in India for 365 days or more in immediately preceding 4 years.

Read detailed definition of NRI.

NRI Taxation in India

An NRI has to pay the Capital Gain Tax on the stock market investment in India. This tax depends on the tenure or the period for which these investments are held by an investor.

The Capital Gain Tax is classified into:

  • Long-term capital gain (LTCG)

    If the period of holding of the securities is more than a year. For debt oriented mutual funds the definition of long term is more than 3 years. The long-term capital gain applies to earning from the sale of stocks, mutual funds, debentures, property, FD interest, etc.

  • Short-term capital gain (STCG)

    If the period of holding of the securities is less than a year. For debt oriented mutual funds the definition of short term is less than 3 years. The short-term capital gain applies to earning from the sale of stocks, mutual funds, debentures, property, FD interest, etc.


NRI Tax Rate

Segment

STCG Tax

LTCG Tax

Equity stocks

15%

10%

Mutual Funds (Equity)

15%

10%

Mutual Funds (Debt)

30%

20%

Derivatives (F&O)

30%

NA

Note: The above tax rates are as of 31-Mar-2019 and are subject to change based on the announcements in the budget.

Let's discuss each of these segments in detail:


NRI Tax on Stocks

Factors impacting the TDS calculation

Sr Factor How is it Calculated? Purpose

1

Amount of Capital Gain

Selling Price Less Purchase Price

It is required to determine the amount on which TDS is to be applied

2

Duration of holding

If the security is held for more than 1 year, it qualifies as Long Term, and if the duration of holding the stock is less than 1 year, it is termed as Short Term.

It is required to determine the rate at which TDS is to be deducted

Long Term Capital Gains Tax Rate: 10%

Short Term Capital Gains Tax Rate: 15%

3

Source of fund for the purchase of stock

Documentary proof viz. contract note and bank details from where the purchase was done.

It is required to prove the source, cost of acquisition and purchase date.

Impact of non-submission of documentary proof:

  1. TDS is deducted at the maximum rate i.e. 15%
  2. TDS is deducted on the entire sales proceeds instead of the amount of gain as the purchase price is not known.
  3. The sales proceeds to NRE account are kept on hold and credited in a suspense account till the documents are submitted

Note:

  • TDS is deducted only at the time of crediting sales proceeds.
  • No TDS is deducted on losses.

Let's assume an NRI buys 100 shares of a company in February 2018 at ₹500 per share and sells the same on March 2019 at ₹600. The TDS on sale of shares by NRI is calculated as:

Capital Gain = Selling price - Purchase price

Capital Gain = (600-500) * 100 = ₹10000

Holding Period = Selling date - Purchase date = 1+ year (long term)

Therefore, the NRI tax rate is 10%.

The tax rate would also depend on the type of bank account NRE (PIS or Non-PIS) or NRO, based on the documentary proof provided. Let's look at each scenario individually-

Note: The sale proceeds taken into account in the below examples is the net sale proceeds [i.e. Exclusive of brokerage, STT and other charges].

NRE/NRO PIS Account

In this scenario, you are not required to provide any documentary proof as the PIS cell would have the details of the purchase transaction. However, the requirements may differ from bank to bank and some banks may require the documentary proof. The TDS rate applicable would be 10%.

Thus, the NRE/NRO PIS account would be credited with

60,000 - [(60,000- 50,000) *10%] = 60000 - 1,000 = ₹59,000

NRE Non-PIS Account

In this scenario, since PIS cell does not keep records of trading transactions under Non-PIS, you need to submit the documents like contract notes to prove the purchase date, price, and the source of funds. If documents are not provided, TDS is deducted at a maximum rate of 15%. Till the time documents are not received, the sale proceeds of the stocks will not be credited and will be parked in a suspense account with the bank.

If the documents are submitted, the NRE Non-PIS Account would be credited with:

60,000 - [(60,000 - 50,000) *10%] = 60000 - 1,000 = ₹59,000

If the documents are not submitted, the NRE Non-PIS Account would not be credited and the funds will be parked in a suspense account post deduction of TDS at a higher rate of 15% as below

Since the purchase price is not known, TDS of 15% is deducted on the entire sales proceeds of 60,000 and ₹51,000 is parked in a suspense account. [60,000 - 15% of 60,000]

NRO Account

In this case too, since PIS cell does not keep records of trading transactions under NRO accounts, you need to submit the documents like contract notes to prove the purchase date, price, and the source of funds. If the documents are not provided, then TDS is deducted at a maximum rate of 15%. If the documents are provided then TDS at 10% would be applicable (since the stocks were held for more than a year).

Thus if the documents are submitted, the NRO account would be credited with:

60,000 - [(60,000- 50,000) *10%] = 60,000 - 1,000 = ₹59,000

If the documents are not submitted, the NRO account would be credited with:

60,000 - [15% of 60,000]* = 60,000 - 9,000 = ₹51,000

* TDS is deducted at a higher rate as the purchase date is unknown and is computed on entire sales proceeds since the purchase price is not known.


NRI Tax on Mutual Fund

NRI capital gains tax on Mutual Fund is calculated based on the type of Mutual Fund.

  • For equity-based mutual funds, the tax slab of TDS is at a rate of 15% under STCG and 10% under LTCG.
  • For debt mutual funds, the tax slab of TDS is at a rate of 30% under STCG and 20% under LTCG.

NRI Mutual Fund Dividend Distribution Tax (DDT)

Fund Type

DDT

Equity Mutual Funds

(10% + 12% Surcharge + 4% Cess)= 11.648%

Money market or Liquid schemes/debt schemes

(25% + 12% Surcharge + 4% Cess)= 29.12%

Infrastructure Debt Fund

(5% + 12% Surcharge + 4% Cess)= 5.824%

To understand in detail about NRI Mutual Funds in India, process & taxation read NRI Mutual Fund Investment Online in India.


NRI Tax on Derivatives Trading

Tax slab of TDS on derivative is at a flat rate of 30.90% on the net profit for a calendar month. (Tax 30% + Ser Chg 3%)


NRI Tax on Interest Income

The NRI tax in India is also applicable on the interest earned from bank deposits at the rate of 30%. Interest earned on Non-Resident External (NRE) accounts and Foreign Currency Non-Resident (FCNR) accounts are tax-free in India, and no TDS is deducted. Interest earned through Non-Resident Ordinary (NRO) account is subject to TDS deductions.

Note that for other income of an NRI including rents and other services, 30% TDS is deducted.


Tax Deducted at Source (TDS) for NRI

As per IT regulations, Taxes (if applicable) has to be deducted at source for all the profits earned in the equity market transactions by NRIs. TDS for NRIs are applicable to profits earned from stocks, mutual funds, debentures, and other investment instruments. Before crediting sales proceeds it is the responsibility of the payer (in this case stock broker) to calculate the applicable Taxes and deduct it at the source.

TDS is deducted by Banker at PIS Bank.


NRI TDS Calculator

The calculation of NRI stock trading tax depends on 3 factors:

  • Capital Gain = Selling price - Purchase price
  • Duration of holding of shares (Short term or long term)
  • Source of funds- NRE (PIS or Non-PIS) or NRO

NRI TDS Calculator for Stocks

Let's assume an NRI buys 100 shares of a company in February 2018 at ₹500 per share and sells the same on March 2019 at ₹600. The TDS on sale of shares by NRI is calculated as:

Capital Gain = Selling price - Purchase price

= (600-500) * 100 = ₹10000

Holding Period= Selling date - Purchase date = 1+ year (long term)

Therefore the NRI tax rate is 10%.

The tax rate would also depend on the type of bank account NRE (PIS or Non-PIS) or NRO, the sale proceeds are credited to. Let's look at each scenario individually-

NRE PIS Account- For credit on NRE PIS account, the TDS will be 0%. However, your transaction will be recorded by the PIS cell.

NRE Non-PIS Account- Since PIS cell does not keep records of trading transaction under Non-PIS, you need to submit the documents like contract notes to prove the purchase date, price and the source of funds. If documents are not provided, then it will deduct the maximum TDS at 15%. Till the time documents are not received, the sale proceeds of the stocks will not be credited and will be parked in the suspense account with Bank.

NRO Account- Since PIS cell does not keep records of trading transaction under NRO accounts, you need to submit the documents like contract notes to prove the purchase date, price and the source of funds. If documents are not provided, then it will deduct the maximum TDS at 15%. If the documents are provided then TDS at 10% (since the stocks were held for more than a year) would be applicable.

NRI TDS calculator for Derivatives (Futures & Options)

For trading in Futures & Options, an NRO account will have to be linked to the trading account. NRI investors have to pay TDS at the rate of 30.90% (Tax 30% + Service Charges 3%) for trading in F&O. The taxes are charged on the net profit for a calendar month.

NRI TDS on Mutual Fund Calculator

Let's say you invest ₹10,000 at a NAV of ₹10 in a debt mutual fund in April 2016. You got 1000 units of the mutual fund. You redeem your investments, after 3 years, in April 2019 when the NAV was at ₹20. So, your gains are-

(Selling price- Buying Price) x No. of Units

(₹20-₹10) X 1000= ₹10,000

Since your holding is over 3 years, LTCG will be applicable on your gains. You need not have to pay tax for entire ₹10,000 as you can also benefit from indexation.

Indexation in Mutual Funds

We all know that the value of rupee decreases with time. Inflation eats into the value of the rupee and reduces its purchasing power. This is why tax laws allow indexation benefit when you compute capital gains. It adjusts the cost of buying mutual funds for inflation while computing the gains.

The Central Board of Direct Taxes notifies the cost of inflation index (CII) applicable for the financial year. It is influenced by the rise/decrease in prices of items included in the index.

Mutual Fund Indexation Calculator (Mutual Fund Indexation Formula)

The Indexed Cost of Acquisition (ICoA), is calculated using the following formula:

ICoA = Original cost of purchase * (Cost Inflation Index of the year of sale/Cost Inflation Index of the year of purchase)

Mutual Fund Indexation Formula

Say CII of the year of sale was 1200 and CII of the year of purchase was 1100.

IC0A= ₹10,000 x (1200/1100) = ₹10,000 X 1.09 = ₹10,909.09

Your cost of purchase would be considered ₹10,909.09 instead of ₹10,000. So, you will pay taxes on ₹9090.91 instead of ₹10,000.

The LTCG on ₹9090.91 @ 10.30% will be ₹936.37.


Conclusion

NRIs have to pay taxes on gains from their investments in various securities in India. The rate of taxes varies from instrument to instrument. It also depends on whether the source of funds is directed from a PIS or a non-PIS account. The type of bank account used NRE or NRO for investments also plays a role in deciding the tax eligibility and rates. NRIs should carefully understand the tax implications of every instrument and the source of the funding process before making an investment.

 

ProStocks Non-PIS NRO Trading

 



Frequently Asked Questions

  1. 1. Should an NRI file tax return in India?

    Yes, an NRI has to file Income Tax Return for the income earned in India under section 80C. If the income of an NRI exceeds Rs 2.5 lakhs annually, income tax is applicable.

    If your tax liability exceeds Rs 10,000 in a year, then you are required to pay advance tax.

    Income tax return (ITR) has to be filed before 31st July by every individual who is liable to pay taxes in India, including NRIs. ITR can also be filed by an NRI if he wants to carry forward a loss or wants to claim a refund. If the income of NRI is taxable in India and the foreign country, you can claim the Double Taxation Avoidance Agreement (DTAA) to get refunds.

     

  2. 2. Do stock dividends get automatically deposited in linked NRI bank account?

    Yes, the dividends are automatically credited through electronic fund transfer in the linked NRI bank account.

    NRI demat account is linked to NRE or NRO Saving Bank Account at the time of account opening. The benefits from demat holding including dividend, interest, etc. are automatically credited to the linked NRI Bank Account.

    NRIs usually open 2 demat accounts; NRO and NRE Demat Accounts.

    1. The NRO Demat Account is for non-repatriable investment, ESOP and to keep stocks from old resident Indian demat account.
    2. The NRE Demat Account is for new stock market investment repatriation basis through PIS.

    NRI Dividend Repatriability:

    • The dividend received in the NRO account on account of shares held in the NRO Demat account is repatriable to the extent of USD 1 million per year along with other assets for NRIs/ PIO.
    • The dividend received in the NRE account on account of the shares held in the NRE Demat account is freely repatriable.

    Note:

    • Only 1 bank account can be linked with a demat account.
    • Corporate benefits may be in the form of the dividend, interest, rights, bonus, etc.
    • Any corporate benefit resulting out of investment in securities on a non-repatriation basis will not carry the right of repatriation.

    Any corporate benefit resulting out of investments in securities on a repatriation basis will carry the right of repatriation.

     

  3. 3. What if I continue using resident demat account after becoming NRI?

    While technically you can do it if you do not inform the bank or broker about your change of status, but this is against the law.

    The section 6 of the Income Tax Act, 1961 and RBI circular No.8/2013-14 in India clearly define the NRI Status. The financial transactions done by an NRI are reported to the RBI by the bank, broker, Custodian or Mutual Fund AMCs.

    As soon as your status changes to an NRI, you should inform the financial organizations you are dealing with in India. They will help you to convert your existing accounts (Demat, Trading, Bank etc.) to the NRI accounts and transfer holdings to the new account.

    Note:

    • A resident demat account can be converted into an NRI demat account.
    • A resident trading account cannot be converted. It has to be closed.
    • If you are trading in F&O, you will have to open an additional account with Custodian. Unlike resident trading accounts where the broker keeps the margin money, in case of an NRI, the Custodian holds your margin.

     

  4. 4. Can NRI invest in mutual funds from NRO account?

    Yes, NRIs can invest in Mutual Fund from the NRO bank account on a non-repatriation basis. This is the easiest way for NRI to invest in India. NRI doesn't need PIS permission or report the transaction to RBI.

    The main condition for NRI mutual fund investment is that the funds should be in Indian rupees from either of the NRI bank accounts as per FEMA regulations.

     

  5. 5. Can NRI transfer shares to resident Indian?

    An NRI can transfer shares to resident Indian by way of sale or gift. General guidelines about the transfer of shares from NRI to resident Indian:

    No RBI permission required

    1. To transfer shares acquired other than PIS route by way of gift.
    2. To transfer shares acquired through PIS route to relatives as defined in Section 6 of Companies Act
    3. For the sale of shares under private arrangement provided SEBI regulations and FEMA pricing guidelines are met.

    RBI permission required

    1. For the sale of shares under private arrangement where SEBI regulations and FEMA pricing guidelines are not met.
    2. For transfer by way of gift or sale of shares under private arrangement acquired through PIS route.

     

  6. 6. Can NRI gift shares to resident Indian?

    An NRI can gift shares to a resident Indian freely. The shares acquired through the PIS route cannot be transferred by way of a gift without prior approval from RBI unless they are being transferred to a relative as defined under Section 6 of Companies Act.

    From the taxability perspective, the recipient of the shares will be taxed in India if the value of shares exceeds ₹50,000 and the recipient does not qualify as a relative. There is no tax levied on the NRI gifting the shares.

     

  7. 7. What taxes are to be paid by an NRI in India?

    An NRI has to pay taxes on the income earned or accrued in India. An NRI is also required to pay Long-term or Short-Term Capital gains taxes on the profits made from its investments in various securities in India.

    The Long-term Capital gains tax becomes applicable when security is held for more than one year. However, if the stock or mutual fund is debt oriented, the holding period to qualify as long-term is 3 years.

    The Short-term Capital gains tax is applicable when security is held for less than a year. For debt-oriented stocks or mutual funds, the short-term capital gains are applied when the holding period is less than 3 years.

    The capital gains tax applies to the sale of stocks, mutual funds, debentures, property, etc.

    NRI capital gains tax

    Segment STCG Tax LTCG Tax

    Stocks

    15%

    10%

    Mutual Funds (Equity)

    15%

    10%

    Mutual Funds (Debt)

    30%

    20%*

    Derivatives (F&O)

    30%

    NA

    NRI Tax Rates as of 31st Mar 2019

    *The LTCG of 20% on debt mutual fund is available with indexation benefit.

     

  8. 8. How are NRIs impacted with the removal of Dividend Distribution Tax?

    With effect from 1st April 2020, the dividend distribution tax at the company and the mutual fund level have been abolished and the dividend will be taxable in the hands of the investors.

    The company will pass on the full dividend to the shareholders which will be taxable in the hands of the investor as per their tax slabs. This move would benefit the NRIs in the lower tax bracket and impact the NRIs in higher tax brackets (more than 20%) who would require to shell out more tax than earlier. One plus point here would be that NRIs can avail of the Double Tax Avoidance Agreement under the new regime (if India has signed DTAA with your residing country) to lower their tax burden. DTAA has dividend withholding tax in the range of 5-15% subject to certain conditions. This would benefit the NRIs in the higher tax bracket by paying lower tax amounts.

    However, now the even the mutual fund will credit full dividend proceeds in the investor account without deducting any taxes which would be taxable in the hands of the NRI. With this, the dividend pay-out mutual fund options may become little costlier and complex from the taxability perspective and may shift the focus of mutual fund investment from dividend pay-out options to growth pay-out options to avoid these issues.

     

  9. 9. Can an NRI File an Income Tax Return in India?

    An NRI is required to file an income tax return in India if the taxable Indian income of an NRI exceeds ₹2,50,000 in a financial year.

    The last date for filing an income tax return for an NRI is the same as that for a resident Indian i.e. 31st July. An NRI can also claim deductions subject to certain restrictions.

    An NRI is required to pay tax only on the Indian income and not on the income earned outside India. Thus, the interest earned on NRE and FCNR accounts is not taxable in India. Below are some of the examples of taxable income in India:

    • Salary received in India
    • Capital gains on sale/transfer of Indian assets
    • Income from an Indian house property
    • Interest on NRO savings account and Fixed Deposits

     

  10. 10. Does the broker deduct TDS on earning in NRI Trading Account?

    As per section 195 of the Income Tax Act, it is the responsibility of the person making payment to the NRI to deduct TDS before crediting the proceeds to the NRI account.

    Generally, TDS is deducted by the bank with whom the NRI has opened the PIS account for trading before crediting the sale proceeds to the account. However, if the NRI is trading through the Non-PIS NRO account, it is the responsibility of the broker to calculate and deduct TDS before crediting the sales proceeds to NRI.

     

  11. 11. Are dividends earned by an NRI from an Indian company taxed?

    With the removal of the Dividend Distribution Tax in Finance Bill 2020, dividends earned from an Indian company are taxable in the hands of the shareholder effective 1st April 2020. An NRI can avail DTAA to reduce the tax burden further as applicable. In some countries, the tax rate on dividends ranges between 5-15%. This can benefit the NRI where their country of residence has signed DTAA with India.

    Tax Rates on Dividend income

    Particulars

    Tax Rate

    Dividend income from shares of an Indian company purchased in foreign currency or any other case

    20%

    Dividend on GDRs of an Indian Company or Public Sector Company (PSU) purchased in foreign currency

    10%

    As per Income tax rules, TDS is required to be deducted before making any payment to the NRI. Thus, an NRI is paid the dividend post deducting TDS at below rates.

    Tax Rates on Dividend income

    Particulars

    Tax Rate

    Dividend on GDRs of an Indian Company or Public Sector Company (PSU) purchased in foreign currency

    10%

    Dividend income from shares of an Indian company purchased in foreign currency.

    20% or rate as prescribed in DTAA whichever is lower

    Dividend income in any other case

    30% or rate as prescribed in DTAA whichever is lower

     

  12. 12. Can I Convert funds of the NRI account to any other foreign currency?

    The funds held in the NRE bank account can be easily converted to any other foreign currency at prevailing forex rates. However, the funds in an NRO bank account cannot be freely repatriated to any foreign currency and is subject to conditions with a maximum limit of USD 1 million per financial year.

    An NRE account is a bank account to manage the foreign income in India. It is a repatriable account and the principal and interest in the account are freely repatriable without any restrictions.

    An NRO account is an account to manage Indian income earned by NRI in India. An NRO account is non-repatriable by its legal nature. Earlier, the funds from the NRO account were strictly non-repatriable. However, later in May 2012, RBI permitted the repatriation from the NRO account but with conditions.

     

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