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

Published on Thursday, July 18, 2019 by Chittorgarh.com Team | Modified on Wednesday, November 20, 2019

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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 the purpose of NRI Taxation, a Non-Resident Indian (NRI) is:

  • An individual who stayed in India for less than 60 days during the tax year.
  • In the case of Indian citizens who leave India for employment outside India, the period of stay is less than 182 days.
  • A citizen of India or a Person of Indian Origin (PIO) residing outside India is regarded as Non-Resident if his total stay in India is less than 182 days in the financial year.

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:

1. NRI Tax on Stocks

Tax slab of TDS on stock trading profits is at a flat rate of 15% under short term capital gain and 10% under long term capital gain for NRI's.

2. 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.

3. 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%)

4. 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

1. 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.


2. 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.


3. 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.

FAQ's

  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.

    Discuss this question

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