Overseas mutual funds are long-term assets if held for 36 months
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I lived in the US for 5 years and am now returning to India. I had invested in stocks and funds there. I want to liquidate that money and bring it to India. Some of the investments were held for over 4 years and some for less than 2 months. How will that money be taxed in India? What documents do I need to carry, in case the tax department wants to enquire about this income at a later date?
Taxability in India depends on the following factors:
(a) source of income, and
(b) residential status as per income tax law.
Typically, source of income lies where the services are performed, or where the asset, from which the income arises, is located. Residential status under the income-tax law is determined based on your physical presence in India in the current financial year (FY) (1 April to 31 March) and the preceding 10 FYs.
Depending on the number of days of presence in India, there can be following types of residential status in India:
(a) resident and ordinarily resident (ROR),
(b) resident but not ordinarily resident (RNOR), or
(c) non-resident (NR).
An individual qualifying as ROR is taxable on global income. An individual qualifying as RNOR is taxable on income sourced from or received in India and income which is derived from a business controlled in or a profession set up in India. An individual qualifying as NR is taxable only on income sourced from or received in India.
You would qualify as ROR in India if:
(a) you are in India for 60 days or more in the current FY and more than 365 days in the preceding four FYs or 182 days or more in the current FY; and
(b) you were in India for 730 days or more in preceding seven FYs; and
(c) you were a resident in India for at least 2 years in preceding 10 years.
If the above conditions are not satisfied, you would be NR or RNOR in India.
In case you qualify as an NR or an RNOR in India, the income earned outside India and first received outside India will not be taxable in India. Subsequent remittance of the said income will also not be taxable in India. In case you qualify as an ROR in India, sale of shares and mutual funds outside India will be taxable as capital gains in India. Capital gain is taxable as the difference between sale consideration less cost of acquisition less cost of transfer.
Shares of overseas companies are classified as long-term if they are held for more than 24 months. Whereas, overseas mutual funds are classified as long-term if they are held for more than 36 months.
Long-term capital gain (LTCG) is taxed at 20% plus applicable surcharge and education cess, with the benefit of indexation on the cost of acquisition. Thus, it is taxed at an effective rate of 23.69% if the total taxable income is more than Rs1 crore. Short-term capital gain (STCG) is taxable at applicable slab rates plus applicable surcharge and education cess. The maximum marginal tax rate applicable in India is 35.535%, if the total taxable income is more than Rs1 crore.
Subject to specified conditions, LTCG can be claimed exempt from tax to the extent it is re-invested in India in specified bonds or a residential house (to be either purchased either 1 year before or within 2 years or constructed within 3 years of transfer of the land). But there are certain restrictions on the sale of new house bought and the quantum of investment made in bonds. If this capital gain is not invested until the due date of filing of tax return in India (i.e., 31 July), you may deposit the amount of capital gain in a Capital Gain Account Scheme (CGAS) with a bank (not later than the due date of filing returns), and subsequently withdraw this amount for re-investment. If the entire amount is not reinvested or deposited in CGAS, the remaining portion of the gain will be taxable.
Tax on LTCG or STCG can be either paid by way of advance tax in four instalments (15% by 15 June, 45% by 15 September, 75% by 15 December, and 100% by 15 March) or before filing a return along with interest by 31 July.
In case of double taxation, applicable benefit may be explored as per the provisions of the Double Taxation Avoidance Agreement between India and the US.
You may keep and maintain the following documents in case the income-tax return is picked up for audit:
(a) portfolio statement for the stocks purchased and sold during the relevant year,
(b) copy of bank statements for the relevant year in which the stocks were purchased,
(c) copy of bank statements for the relevant year in which the stocks were sold,
(d) tax reporting statement issued by your portfolio manager,
(e) US tax return for the relevant year,
(f) any other document to show that you have purchased the stocks and sold the stocks outside India, and
(g) copy of passport with relevant arrival and departure stamps.
The above list is illustrative in nature, further documents may be called for by the Indian revenue authorities at the time of audit
Thus, in your case if you qualify as ROR in India and the sale transaction has happened in the relevant year you qualified as ROR, the same will be taxable in India. However, if the sale transaction has happened in the prior year (not in the year you qualified as ROR, the sale transaction will not be taxable in India.
If you qualify as NR or RNOR, the sale transaction will not be taxable in India. Subsequent transfer of money from sale transaction to India will not be taxable in India.
Queries and views at firstname.lastname@example.org
Sonu Iyer is tax partner & people advisory services leader, EY India.