Ramesh Pathania/Mint
Ramesh Pathania/Mint

NRIs can continue to invest in mutual funds

Most mutual funds in India are available only for resident Indians. However, you don't need to discontinue the investment if your resident status changes

I have a small family business in India and I will be moving to Australia for a 3-year assignment. I have investments worth Rs12 lakh in mutual funds and stocks. Can I continue to stay invested in them? I can withdraw this money and my father can invest on my behalf. From a tax perspective, what will be a smarter thing to do? Please advise.

—Manpreet Singh Rekhi

You may stay invested in the shares and mutual funds through a non-resident demat account (NR demat account).

Under the exchange control laws, when an individual leaves India for taking up employment or for carrying on business or vocation outside India or for any other purpose indicating his intention to stay outside India for an uncertain period, his existing resident bank account should be designated as a non-resident (ordinary) account (NRO account) due to change in residential status. The residential status under the exchange control law is different from that in income-tax laws.

You will need to inform the change of residential status to the bank where you have the resident demat account. A new NR demat account will be opened and securities would be transferred from the resident demat account to NR demat account. The resident demat account will be closed.

In this case, you will be able to trade from the NR demat account. 

Alternatively, you may sell your investments and transfer the money to your father for further investment.

Transfer of money to your father will not be taxable in India either for you or your father. Under the income-tax laws, income tax is payable on any sum of money, movable property or immovable property received by an individual without consideration, except if the same is received from a ‘relative’. Under this provision, the term ‘relative’ includes father and son.

The taxability in both the above alternatives remain the same in the hands of seller as mentioned below:

i. Units of equity-oriented mutual funds that are held for more than 12 months are considered as long-term capital assets. Long-term capital gains on sale of equity-oriented mutual funds are exempt from tax in India. Short-term capital gains on the same are taxable at flat 15% (plus surcharge, if applicable, and education cess).

ii. Units of non-equity (debt) oriented mutual funds that are held for more than 36 months are considered long-term capital assets. Long-term capital gains on sale of debt mutual funds, after giving benefit for indexation, are taxable at flat 20% (plus surcharge, if applicable and education cess). Short-term capital gain on the same are taxable as per the slab rates as applicable.

iii. Equity shares listed on a recognized stock exchange in India will be classified as long term if held for more than 12 months. 

Long-term capital gains from sale of listed equity shares are tax exempt provided securities transaction tax (STT) has been paid. Short-term capital gains on the same are taxable at flat 15% (plus surcharge, if applicable, and education cess).

I am an NRI living in Qatar. Recently, after the family partition of properties, I got my share which amounted to Rs21 lakh. As I am not in need of this money, I have decided to give this money to my sister as she isn’t financially well off. Is there any tax implication on this? What things should I keep in mind from a tax perspective as it is a big amount? 

—Lovneesh Kumar

Under the India income-tax laws, any asset received under a Will or by way of inheritance is not taxable in India. 

Transfer of money to your sister will not be taxable in India for your sister. Under the income-tax laws, income tax is payable on any sum of money, movable property or immovable property received by an individual without consideration, except if the same is received from a ‘relative’. Under this provision, the term ‘relative’ includes:

i. Spouse 

ii. Brother or sister 

iii. Brother or sister of the spouse 

iv. Brother or sister of either of the parents 

v. Any lineal ascendant or descendant 

vi. Any lineal ascendant or descendant of the spouse 

vii. Spouse of the person referred to in clauses (ii) to (vi) 

Therefore, a gift of money to your sister will not be subject to tax in India.

Your sister will be required to pay tax on and report any interest income earned in her India income-tax return. 

She may get a deduction under Section 80TTA of the Income-tax Act, 1961 for interest income from savings bank accounts in India up to Rs10,000. It is recommended to maintain appropriate documentation of the transaction.

Queries and views at mintmoney@livemint.com

Sonu Iyer is tax partner and people advisory services leader, EY India.

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