Tax Implications of Your Investments in India (2024)
Vikram Chari|
As all investors know, investments should be compared based on their after-tax returns. Real estate is subject to capital gains tax because real estate is classified as a capital asset. (Under exceptional circ*mstances, an investor who regularly trades in real estate may have to pay ordinary income tax as opposed to capital gains tax.)
India, like many countries, taxes capital gains differently from ordinary income. Long-term capital gains are taxed at preferential rates and short-term capital gains may or may not be taxed at preferential rates depending on the type of capital asset involved. In addition, listed securities and other assets have different periods to determine whether the investment is subject to long-term or short-term rates. Since tax rules are subject to change at any time, the reader is advised to consult a tax advisor to determine the rates that may be applicable to him. The information below is only a brief summary of rules that are complex and lengthy, and is not meant to be a substitute for professional advice.
Taxation of direct investments
An investment in real estate gets the benefit of long-term capital gains if it is held for a period of at least 36 months. The long-term capital gains tax rate is 20% while the short-term rate can be as high as 30%. (There are also some additional taxes that amount to less than 1%.) Although long-term rates are significantly less than short-term rates, one has to weigh that against the economics of the investment opportunity. Short-term opportunities tend to have higher returns and they are also more predictable.
Most foreign investment in Indian securities comes from jurisdictions that have preferential tax treaties with India. For investments that are not subject to such a treaty, the general prevailing Indian taxation of securities transactions will apply. Investments in equities can be expected to earn dividends and have a capital gain or loss at the time of resale. Investments in debt will earn interest and could also have a capital gain or loss.
Dividends paid by Indian companies are not subject to tax at the hands of the recipient. However, this rule is not as advantageous as one might think because the dividend-paying company is required to pay a dividend distribution tax, which results in a tax-inefficient structure.
Capital gains tax rates for securities are based on two variables: (a) whether it is a long-term gain or a short-term one and (b) whether the gain is from a listed share or equity fund, or other securities. In India, an investment of less than or equal to a year is subject to short-term rates while an investment for more than a year is subject to long term-rates. Long-term gains from listed shares are taxed at a zero rate and long-term gains from other securities are taxed at around 10%. Short-term gains are taxed at around 15% and around 30% for listed shares and other securities, respectively.
Interest earned by foreign investors from listed bonds is taxed at around 20% but the government has recently announced special rates for investments in certain types of debt instruments. Unfortunately, at the time of this writing, it is not clear whether these lower rates (5%) will be applicable to debentures issued by real estate companies.
Tax treaties
India has double-tax avoidance agreements (DTAAs) and treaties with a number of countries. An investor has to evaluate the treaty between India and the country of his residence to determine his specific tax outcome from an investment in India. In general, under most DTAAs, profit from a direct investment in real estate is taxed in the country in which the property is located, so an NRI who purchases real estate in India will be taxed as per applicable Indian tax rates as mentioned earlier. However, the tax outcome of an investment in equity or debt can vary quite substantially depending on the country from which the investment is made. It is for this reason that most investments into India come through a small number of jurisdictions that have preferential tax rates for investments in equity or debt. For example, much of the equity investments into India come from Mauritius and much of the debt investments into India come from Cyprus. The other preferred jurisdictions for investments into India are Singapore and the Netherlands.
Dealing with the Indian income tax authorities
Few investors enjoy dealing with the tax authorities of any country. Dealing with India’s tax department can be a particularly unpleasant experience because laws are sometimes drafted poorly and the resulting lack of clarity gives the tax authorities discretion to affect the tax outcome. As in most emerging markets, discretion given to government employees can sometimes be exploited to the disadvantage of the investor. Therefore, it is best to structure one’s investments into India such that only well-settled and clear tax rules are applicable to the transaction.
Long-Term Capital Gains (LTCG) on shares and equity-oriented mutual funds in India are taxed at a 10% rate (plus surcharge and cess) if they reach Rs. 1 lakh in a fiscal year. LTCG is defined as profits on the sale of shares or equity-oriented mutual funds held for more than a year.
If you sell an asset for more than you paid for it, your profit (minus your cost basis) is called a capital gain. Short-term capital gains are profits from selling assets you own for a year or less. They're usually taxed at ordinary income tax rates (10%, 12%, 22%, 24%, 32%, 35%, or 37%).
The long-term capital gains US stocks tax rate for international investors, including Indian residents, is typically 15% or 20%, depending on the person's income level. Dividend Tax: If the US equities you own pay dividends, the US and India may tax your income.
For equity investments, a holding period under one year incurs a 15% tax rate (short-term), while over a year attracts a 10% tax rate (long-term). Similar distinctions apply to foreign equity shares and debt instruments. Check the table below.
Tax Benefits: Investments in PPF qualify for deductions under Section 80C, and the interest earned and maturity proceeds are tax-free. Remember that under Section 80C, the income tax-free investments limit in India is capped at ₹1.5 lakhs.
Individual taxpayers do not have to pay income tax on long-term capital gains (LTCG) up to Rs 1 lakh earned on the sale of equity shares or equity-oriented mutual funds. Gains from selling of equity shares and equity oriented MFs is considered long-term if it is sold after holding for 12 months or more.
What is the Capital Gains Tax rate? The amount of tax you're charged depends on which income tax band you fall into. Basic-rate taxpayers are charged 10% on their realised profits, while higher-rate (and additional rate) taxpayers must pay 20%.
Find out if Net Investment Income Tax applies to you
The statutory threshold amounts are: Married filing jointly — $250,000, Married filing separately — $125,000, Single or head of household — $200,000, or.
Q- How much foreign Income is tax-free as per the Indian Income Tax Act? As per the IT Act, of 1961, any income up to INR 2,50,000 is exempt from income tax. The foreign income is treated as domestic income, and tax is levied as per the applicable slab rates.
Yes, Indians can invest in the US stock market. There is more than one way to buy and hold US stocks in your portfolio. Direct equities, ETFs, and mutual funds are just one of the few popular options. You can invest in US stocks in two ways from India – indirect and direct.
NRIs are subject to Tax Deducted at Source (TDS) at applicable rates on capital gains, irrespective of any threshold value. The TDS rate is 10% for equity-related capital gains and 20% (post-indexation) for non-equity investments.
Day traders will be required to pay taxes on their profits at the applicable slab rates. What is considered intraday trading for tax purposes? Intraday trading is buying and selling securities within the same trading day. Any profit or loss from such transactions is considered intraday trading income for tax purposes.
However, no tax is deducted on the dividends paid to resident individuals, if the aggregate dividend distributed or likely to be distributed during the financial year does not exceed INR.5000. A 10% TDS is payable on the dividend income amount over INR 5,000 during the fiscal year.
What is the Capital Gains Tax rate? The amount of tax you're charged depends on which income tax band you fall into. Basic-rate taxpayers are charged 10% on their realised profits, while higher-rate (and additional rate) taxpayers must pay 20%.
Yes, capital gains earned from selling stocks are typically taxable. The tax rate varies depending on the holding period (short-term vs. long-term) and your individual tax bracket.
In short, investors are taxed on their capital gains, while traders are taxed on their business income. Speculative Business Income: Intraday transactions are speculative in nature, and hence, the income from these trades is called speculative business income.
Long-term capital gain tax is applicable at 20% except on the sale of equity shares and the units of equity-oriented funds. Long-term capital gains are 10% over and above Rs 1 lakh on the sales of equity shares and units of equity-oriented funds.
Introduction: My name is Lakeisha Bayer VM, I am a brainy, kind, enchanting, healthy, lovely, clean, witty person who loves writing and wants to share my knowledge and understanding with you.
We notice you're using an ad blocker
Without advertising income, we can't keep making this site awesome for you.
In India, an investment of less than or equal to a year is subject to short-term rates while an investment for more than a year is subject to long term-rates. Long-term gains from listed shares are taxed at a zero rate and long-term gains from other securities are taxed at around 10%. Short-term gains are taxed at around 15% and around 30% for listed shares and other securities, respectively.
Dealing with India’s tax department can be a particularly unpleasant experience because laws are sometimes drafted poorly and the resulting lack of clarity gives the tax authorities discretion to affect the tax outcome. As in most emerging markets, discretion given to government employees can sometimes be exploited to the disadvantage of the investor. Therefore, it is best to structure one’s investments into India such that only well-settled and clear tax rules are applicable to the transaction.