NRIs are privy to a separate
concessional tax regime in respect of certain types of income
under Chapter XIIA comprising section 115C to 115I of the
Income Tax Act. As per section 115E, concessional tax of 20 %
is available in respect of investment income and 10% in
respect of long term capital gains from the specified assets
which are acquired out of convertible foreign exchange.
Specified assets are
defined under section 115C (f) as:
i. Shares in
an Indian company.
ii. Debentures and deposits in an
Indian company (which is not a private company).
security of the Central Government.
if a NRI opts for concessional tax treatment, he is taxed at a
flat rate and he cannot avail:
Reinvestment of long term
deduction in respect of any expenditure or allowance under
any provisions of this Act (like interest on over draft,
Bank charges for collection).
of cost indexation for capital gains.
Long term capital gains from sale of specified
assets would be exempt if, within six months, the net
consideration is reinvested in any specified asset or savings
certificate notified under section 10(4B). If only a
proportion is reinvested, proportionate exemption is
available. The holding period for the new asset is three years
and if it is transferred within three years, the capital gain
which was exempted will be liable to be taxed in the year of
such transfer of the new asset [section 115F(2)].
However, there is a cap of Rs. 50
lakhs on tax exemptions from the sale of property, provided
investment is made in bonds issued by the National Highways
Authority of India and the Rural Electrification Corporation.
20% capital gains tax is paid on the remaining amount provided
the property is held for 3 years. Also, the bonds should have
been held for 3 years to avail of the tax exemption. In case
the property is held for less than that, gain from its sale is
treated as income and taxed accordingly at 30% if the income
falls in the highest bracket.
the scheme the NRI need not file his return of income,
total income consists of investment income or long term
capital gains or both, and
has been deducted at source under Chapter XVII-B.[Sec.115G]
Continuance of benefit
The benefit of concessional tax treatment under
chapter XIIA continues even after the NRI becomes a resident.
However he has to file a declaration in writing to the
assessing officer along with the return of income under
section 139. The option having been once exercised is
irrevocable, and the provisions of the Chapter will continue
to apply till the transfer or conversion into money of the
said assets. It is relevant to note that the benefits are not
available for long-term capital gain after the non-resident
Indian becomes a resident. Tax rates for
personal incomes for Financial Year 2006-07(Assessment Year
|Up to Rs.1,
|Rs. 100,000 to Rs. 150,000
|Rs 1, 50,001 to Rs. 2, 50,000
|Above Rs.2, 50,000
Where, the taxable income exceeds
Rs.10, 00,000/-, surcharge of 10% is imposed on the tax
liability. Education Cess @ 3% is levied on the total of the
income tax and surcharge.
Tax on income of Foreign
Institutional Investors (FIIs) from securities or capital
gains arising from their transfer
Foreign companies are permitted to
invest in equity shares traded in Indian Stock markets if they
are registered as a Foreign Institutional Investors (FII) or
if they have a sub account in India.
Investment in Indian securities is
also possible through the purchase of Global Depository
Receipts (GDR), American Depository Receipts (ADR), Foreign
Currency Convertible Bonds and Foreign Currency Bonds issued
by Indian issuers, which are listed, traded and settled
overseas and mainly denominated in US dollars.
Long-term capital gains on sale of
Units would be taxed at the rate of 10% under Section 115AD of
the Income Tax Act. Such gains would be calculated without
indexation of cost of acquisition.
Short-term capital gains would be
taxed at 30% and without conversion of cost of acquisition and
full value of consideration in foreign currency, as the first
proviso and second proviso to Section 48 do not apply to
Foreign Institutional Investors by virtue of Section 115AD(3)
of the Income Tax Act.
The said rates would be subject to
applicable tax treaty relief. The above tax rates would be
increased by applicable surcharge.
No tax would be deductible at
source from the capital gains (whether long-term or
short-term) arising to an FII on repurchase/redemption of
units in view of the provisions of Section 196D (2) of the