Non Residents Indians (NRIs) are those citizens of India / person of Indian origin (PIO) who spends less than 182 days in the country during a fiscal. These Indian leave India for the purpose of job or business abroad or they could be a crew member of any Indian ship.
NRI’s are taxed at the same rate as Resident Individuals (RI) the major difference is that in the former tax is deducted at source (TDS) while it’s not so in the case of the latter. NRIs country of residence determines whether he will be subject to taxation both in India and the country of his residence. The government of India has signed a double taxation avoidance agreement with many of the world countries. For example – if an NRI based in USA makes short term gains in equity market then he would be taxed at 30% in the USA and 15% in India. Once taxed at 15% in India the investor will be taxed at the differential rate in USA.
Stated below is the tax structure for different investment option that NRIs have:
Deposits: There are primarily two types of account where an NRI can deposit the money – Non Resident Ordinary (NRO) and Non Resident External (NRE) account. The difference between the two lies is how the money can be handled in the account in terms of repatriation of amount and also tax perspective.
Interest earned on the savings NRE account and the fixed deposit NRE account is completely tax free, therefore there is no tax deducted at source (TDS) on the same. On the flip side the amount of interest earned on NRO taxable, therefore a TDS is also applied at 30% (there is no basic exemption limit). The principal along with the interest earned in the NREis completely repatriable while on the other hand the amount of repatriation is limited to USD 1 million in a NRO account or the capital appreciation whichever is lower.
| Particulars | NRO | NRE |
| Interest earned in the deposit account | Taxable (TDS @ 30%) | Tax free |
Equity investment (Funds /Stock):NRIs can invest in the fast growing domestic economy by either investing directly in the Indian stock market or through mutual funds. NRIs can invest in Indian stock market under the portfolio investment scheme (PIS) of the Reserve Bank of India (RBI) under which he / she will have to open a NRO / NRE account in a government authorized Indian Bank.
The maximum limit to which all NRIs / PIOs put together can hold in an Indian company is limited to 10% of the paid up capital of the company. Non delivery based trading is prohibited for NRIs i.e. neither can they do day trading nor can they short sell in the India stock market.
Debt Funds: Even though the interest rates are declining in India they are much higher in contrast to other developed countries like USA, UK, Japan etc.On the back of this the return on debt funds here is way above the developed countries.
| Particulars | Equity Stocks / Funds | Debt Funds |
| Short Term capital Gains | 15% | As per Tax slab |
| Long Term capital Gains | NIL | 20% with indexation |
| Dividend Distribution Tax | NIL | 28.84% including cess and surcharge |
Realty: While purchasing a residential property income tax of 1% of the value of the property is deducted if the valuation of the property exceeds Rs. 50 L; where as if you are buying the property from an NRI the deduction is much higher. In the same way while selling the property the capital gains from the sale of the asset should be either invested in approved securities (NHAI / REC Capital gains bond) or residential property in the specified time frame.
As stated earlier the taxation rules for NRI & a RI are the same for all asset classes – whether it is debt, equity or reality.
