Dividend income from foreign MFs taxed at normal slab rates
Dividend income received from these MFs would be treated as income from other sources in India
I had made significant investments in US mutual funds (MF) while I worked there. I returned to India for good in 2002, but continue to hold these investments till date. Through these investments, I generate income through dividends, long- and short-term capital gains (these are gains arising out of buying and selling by the funds) and gains arising out of any selling done by me. All these years, the MF automatically deducted tax at source (TDS). When I report this income in my Indian return, what should be the treatment of each type of income above? I am a self-employed professional falling in the highest tax bracket in India. Also, I would like to know, when converting the US income to its rupee equivalent each financial year, what exchange rate should be used?
—P.S.D. Rajan
As a resident in India, your global income would be taxable in India. The dividend income received from US mutual funds would be treated as “income from other sources" in India and would be subject to tax at normal slab rates.
I am assuming that the capital gains distributed by the MFs is income from sale of securities held by the MFs on your behalf and is offered to tax by you directly. The distributions, therefore, represent the gains made on securities held on your behalf and are to be treated as though such securities were held by you directly.
In such a scenario, the short-term capital gains (STCG) would be taxable in India at the slab rates, which in your case would be the highest rate as stated by you. Long-term capital gains (LTCG) would be taxable at the rate of 20% plus applicable surcharge and education cess. The same treatment would be applicable for capital gains arising from sale of securities directly held by you. Since the dividends and STCG are taxed in the US in your hands, you should be eligible to claim the credit of such taxes in India under the India-USA Double Taxation Avoidance Agreement.
The exchange rates applicable for conversion of foreign currency income into Indian rupees has been prescribed under Income-tax Rules, 1962. As per the prescribed rules, the dividend income has to be converted into rupees by applying the telegraphic transfer buying rates adopted by the State Bank of India (“SBI TT buying rate") as on the last day of the month preceding the month in which the dividend is declared, distributed or paid. Capital gains are to be converted using the SBI TT buying rate as on the last day of the month immediately preceding the month in which the capital asset is transferred.
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