TDS deduction on capital gains: Play by different rules once you turn NRI

Recently, the Budget imposed a 10 per cent long-term capital gains (LTCG) tax on equities. This tax will be deducted at source (TDS) on non-resident Indians (NRIs). The TDS norm doesn’t apply to resident Indians. A person moving abroad needs to be aware of the changed taxation and investment norms that apply to him once he becomes an NRI, and comply with them. 

Change your bank accounts: According to the Foreign Exchange Management Act, 1999 (FEMA), an individual becomes an NRI from the date he leaves the country for employment. Once he informs his banker, his existing resident accounts get re-designated as Non-Resident Ordinary (NRO) Rupee account. Interest earned in this account is taxable.

NRIs can also open a Non-Resident (External) Rupee (NRE) account, which is also rupee-denominated (like NRO). It can be opened by remitting foreign exchange from abroad. Foreign exchange brought in and repatriable income in India can be credited to this account. “Income generated outside India should be invested here through an NRE account while income generated from Indian assets should be invested through an NRO account,” says Vivek Agarwal, co-founder, Upwardly.in, an online advisory and investment platform. Interest earned in this account is tax exempt. 

NRIs can also hold a Foreign Currency Non Resident (Bank) account, or FCNR (B) account. It is a foreign currency denominated account. Interest from it is tax free. 

Money lying in NRE and FCNR accounts can be repatriated without restrictions. “An NRI can remit up to US dollar one million in each financial year from his NRO account out of his current income in India and proceeds from sale of assets,” says Monish Panda, founder, Monish Panda & Associates, a law firm. 

Interest earned on NRO savings account or fixed deposit is subject to tax deduction at source (TDS) at 30 per cent plus applicable cess. If the NRI does not furnish his PAN, TDS will be deducted at the maximum marginal rate of 35.54 per cent. In case of residents, TDS is not levied on interest from savings accounts, only on interest from fixed deposits in excess of Rs 10,000, at 10 per cent. 

An NRI whose income is below the taxable limit or is taxable at a rate lower than the TDS rate should apply to the income tax officer for TDS deduction at a lower or zero rate. “The tax officer, after considering the tax payable on estimated income and tax liability of past three years, will determine the TDS rate and accordingly issue the lower or nil deduction certificate, or the lower rate according to the relevant Double Taxation Avoidance Agreement (DTAA) ,” says Suresh Surana, founder, RSM Astute Consulting Group. An NRI needs to claim a refund for any excess tax paid by filing a return in India. 

Rules for NRIs

• They need to comply with Foreign Account Tax Compliance Act (FATCA), a US government tax policy
• Mutual fund houses have to report transactions of US persons and entities to the US government
• All investors, including NRIs, need to declare FATCA details
• Investments in PPF and NSC are deemed closed as soon as a person turns an NRI. Returns are capped at 4 per cent till withdrawal
• By using DTAA, NRIs can enjoy concessional rate of taxation  

Benefit from DTAA: India has entered into DTAA with many countries. NRIs are subject to TDS under Section 195 the IT Act. If the NRI is the tax resident of a country with which India has a DTAA, the provisions of the IT Act or the DTAA, whichever is more beneficial to the NRI, apply. By using DTAA, NRIs can enjoy a concessional rate of TDS on interest from NRO account. 

Ensure right TDS is deducted in realty sale: NRIs can invest in any immovable property in India, barring agricultural land, plantation property and farm house. They can also sell any immovable property to a resident. “They can’t transfer agricultural land, plantation property or farm house to an NRI or a person of Indian origin resident outside India,” says VS Datey, deputy general manager, Taxmann. 

Money from property sales can be remitted abroad. The amount brought in from abroad, for purchase or to repay a home loan, can be repatriated. Repatriation from sale can be done from the NRO account within the $ 1 million limit for each financial year. “Sales proceeds of only two residential properties can be repatriated,” says Datey.  

In a property transaction with an NRI, the buyer has the obligation to deduct TDS at the applicable rates. If the NRI has held the property for more than two years, LTCG will apply at 20 per cent after indexation. If he has held it for less than two years, short-term capital gains (STCG) will apply at the NRI’s income tax slab rate. Says Archit Gupta, founder and CEO, ClearTax: “The buyer should deduct tax on capital gains only and not on entire consideration. An NRI should approach his jurisdictional assessing officer and have his capital gain determined so that excess TDS is not deducted, or else he will have to claim it back by filing tax return.” 

Invest in stocks via PINS: NRIs who want to invest in India’s listed securities on repatriation basis need to open a Portfolio Investment Scheme (PINS) account, which is linked to their NRE account. Repatriation basis means that the funds invested and gains made can be sent back to their country of residence. Repatriation is allowed if the purchase was made on repatriation basis, and the source of investment was an NRE/FCNR account or funds remitted from abroad. 

NRIs can only invest within certain limits in stocks. They can’t invest more than five per cent individually (or 10 per cent in aggregate) of the paid up value of a company’s shares, or in each series of Convertible Preference Shares, debentures or warrants. “These limits apply only to investments done on repatriation basis,” says Gopal Bohra, partner, NA Shah Associates LLP. 

TDS is deducted at the time the sale proceeds are credited to the NRI’s PINS account by his bank. STCG tax is levied at 15 per cent. No LTCG tax will apply till March 31, 2018, and 10 per cent will be charged thereafter. Finally, in case of small saving instruments, as soon as a person becomes an NRI, his PPF and NSC accounts are now deemed closed and he gets earns only 4 per cent interest until he withdraws.