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NRI taxation scenario
12 Oct, 2017, 07:17AM UTC by Jaydip Mehta

Staying NRI for a couple of years ushers a fresh outlook towards Indian taxation. Here are some probable tax scenarios that can help an NRI understand taxation in India.


Scenario 1:

Rakesh Mangal runs a family business in India. However, he needs to work in Australia for a 3-years long assignment. Rakesh has Rs.12 lacs invested in stocks and mutual funds. He does not want to quit his investments and wants to stay invested as usual. Now the question is whether he can stay invested while in Australia or should he pull out the money and invest through his family who is based in the country? A smart way to approach this situation is to stay invested in mutual funds and shares via NR demat account (a Non-resident demat account). The exchange laws enables an NRI to switch his resident account to a non-resident ordinary account (NRO account). As per the law any Indian who leaves the country for employment or business or a vocation abroad, for a certain period of time, can switch their accounts to an NRO account as a part of their changed residential status. Rakesh has to inform the bank where he has the existing demat account. The bank will open a fresh NR demat account and transfer the existing securities to the same. The old account, however, will be closed. Rakesh will now be able to trade from his new account.


Read more: 5 income tax rules for NRI


An alternate way is to sell the investments and transfer the accumulated amount to a ‘relative’ who can further the investments. In India, transfer of money to a ‘relative’, as defined by income tax law, is not taxable. The IT law states that income tax is payable on a sum of money, or immovable or movable property received by a person without consideration, except if this/these are received from a relative. The term ‘relative’ includes parents, brother, sister, spouse, spouse’ parents, spouse’ brother/sister, etc.

The taxability for the alternatives depend on the seller:

  1. Debt mutual funds possessed for more than 3 years are long-term capital assets. Selling such assets are taxable at 20% (listed funds with indexation) and 10% (unlisted funds without indexation) for long-term capital gains. Taxability in case of short-term capital gains is as per ones income bracket.
  2. Equity funds held for more than 1 year are considered long-term capital assets. Selling equity funds are taxable at 15% for short term capital gain. No tax is implemented on selling equity funds for long-term capital gains.


Read More: how mutual funds capital gain are taxed


Scenario 2:

Deepak Joshi lives in Dubai and receives a property share after family partition. His share amounts to Rs. 25 lacs. However, being well to do in life he decides to give the entire amount to his younger brother who is not well off financially. The Indian Income Tax law exempts asset received by will or by inheritance from tax. Deepak’s brother will receive the amount as a ‘relative’ and will not have to pay tax on the received amount. However, he will have to bear tax on interest earned in India. He will also have to file income-tax returns on the interests earned from this amount.


Read More: 6 taxable income source for NRIs


Scenario 3:

A returning NRI pays tax only on the Indian income. Ravi Bakhda returns to India after living in Dubai for 7 years. How does taxation work on him? Here, Ravi needs to find out his residential status as per income-tax act. He has to do that for both 2017-18, and 2018-19. He is considered an Indian resident if he has spent 182 days in India for a particular financial year, or 60 days in the current year and 365 days in the last 4 fiscal years. If Ravi fulfils these two conditions, then he will be considered an Indian resident. Usually, returning NRI’s are considered RNOR (resident but not ordinarily resident) if they have been abroad in 9 out of 10 fiscal years before the year of return or they have lived in India for 729 days or less in the past 7 fiscal years. Ravi needs to understand his residential status based on the conditions above. If he is an RNOR, he can enjoy tax benefits just like an NRI. However, if he fails to meet such conditions he will be an ordinary resident and will have to pay taxes on both Indian and overseas income.



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