With liberalization of Indian foreign exchange regulations, investing internationally has been seen as a good portfolio diversification strategy by retail investors.
By Shailesh Kumar, Partner and Vaishali Dua, Manager, Nangia & Co LLP
As we all gear up for filing of returns for the previous Financial Year, it is important to make sure that all the taxable income is included in the return to be furnished and appropriate taxes are paid accordingly. Taxability of income depends upon residency principles and the residential status is to be checked on a year to year basis.
Global income is taxable in case of an individual who is resident (and ordinarily resident) of India whereas, in the case of non-residents, only income that accrues or arises in India is taxable. There is one more category of ‘not ordinarily resident’, in whose case global income is not taxed, but any income accruing or arising outside India from a business controlled from or a profession set up in India is also taxed.
Residential status is determined based on the number of days spent in by an individual in India in the relevant year as well as the earlier years (to differentiate between ‘ordinarily resident and ‘not ordinarily resident)’.
With the advent of globalization and liberalization of Indian foreign exchange regulations, investing internationally has been seen as a good portfolio diversification strategy by retail investors. With the fall of the unforeseen pandemic, various such individuals are now looking to liquidate their investments in foreign countries due to financial requirements as well as due to uncertainties around future value of such investments.
However, one would also need to understand and account for tax implications while making a decision. When Resident and Ordinarily Resident Individual earns any income from a foreign company, in the form of interest, dividend or even capital gains from the sale of foreign stock, it would be subject to tax in India.
In case of individuals who qualify as Non-resident and even in cases of Not Ordinarily Residents (unless such income is from any business controlled from India), the aforesaid income from foreign stocks shall not be taxable in India as long as it is received outside India.
Taxability of capital gains from the sale of foreign stocks shall depend on the holding period of the asset, based on which, a capital gain is classified to be either as ‘long term’ or ‘short term’.
If the shares of a foreign company or any immovable property located outside India are held for 24 months or more, the gains shall qualify as long term, whereas in case of foreign mutual funds not listed in any stock exchange in India, the holding period shall be 36 months in order to qualify as ‘long term capital gains’.
This classification into long term capital gains and short term capital gains is very important since long term capital gains are taxed at concessional rate of 20% plus applicable surcharge and education cess, while short-term capital gains are taxed at applicable normal slab rates plus surcharge and education cess. Further, exemption from long term capital gains may be claimed subject to fulfilment of conditions under Sections 54-54GB for reinvestment of capital gains/ sales proceeds.
Also, the Foreign Tax Credit (‘FTC’) paid in the source country shall be available to the Indian residents against Indian income tax liability, subject to prescribed conditions.
ITR to be filed
In case of a resident individual, a return is required to be filed even if he does not have taxable income but has signing authority in any account located outside India or has a financial interest (including beneficial interest) in any entity located outside India.
Individual taxpayers earning capital gains from foreign stocks can choose to file ITR 2 or ITR 3 based upon the nature of income earned during the year.
Individuals can file ITR-2 provided there is no income from profits and gains of business or profession, while ITR 3 would be filed in case the individual has income from profits and gains of business or profession in India along with capital gains from the sale of a foreign stock.
In the ITR, the individual shall need to furnish details under schedule CG in respect of shares/ securities, which are sold during the year. Further, Schedule FSI showing details of income from outside India and Schedule TI for claiming the credit of the taxes paid in the foreign country are also required to be filled in the forms.
It is mandatory to ensure that appropriate documentation is maintained and Form 67 is filed for claiming the benefits of taxes paid in the foreign country.
The taxpayers should take care and be sure of the information being disclosed in the Income Tax Return form so that it does not lead to any adjustment/ tax demand in the future.