The dividend income as well as the capital gains earned by your son from shares listed in India and equity oriented schemes of mutual funds are subject to tax in India
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My son is an NRI. He invests in listed shares and equity mutual funds in India. I would like to know if such earnings are taxable in India. As far as I know interest for NRI are not taxable but have no idea if dividends are taxable or not. Is he eligible for exemption limit of ₹2,50,000 like residents Indians?
A non-resident is liable to pay tax in India only on his Indian Income. Not all interest income earned by an NRI are tax free in India. Though the interest earned by a non-resident on NRE and FCNR account are fully tax free but other interest income like interest on NRO account are fully taxable in India. Even the interest on NRO account are subject to TDS without any threshold limit.
The dividend income as well as the capital gains earned by your son from shares listed in India and equity oriented schemes of mutual funds are subject to tax in India. Like a resident tax payer, a non-resident is also entitled to the basic exemption limit. In case income other than long term capital gains of any nature and short term capital gains on equity shares/equity mutual funds is less than the amount of basic exemption, a resident is entitled to set off such short fall against any long term capital gains and short term capital gains on equity products. The same facility to set off the short fall in basic exemption limit is not available to a non-resident. So he has to pay full tax on these capital gains even if he does not have any other income or such other income is below the taxable limits. A non resident has to pay tax at the rate of 20% and applicable surcharge and cess on his dividend income. The liability to tax on dividends will arise only if his aggregate income excluding the capital gains stated above exceeds the amount of basic exemption limit.
Though he may not have to pay any tax on dividends but he will still have to pay tax on all short term capital gains earned on Indian equity at flat rate of 15%. Long term capital gains on listed shares and equity schemes will enjoy a basic exemption of one lakhs on long term capital gains on Indian equities and beyond one lakhs he will have to pay @ 10% without any indexation benefit where on other long term capital gains he will have to pay tax at flat rate of 20%. Please note your son is not entitled to any deduction in respect of various items under Chapter VIA like life insurance premium, medical insurance, home loan repayment, NPS, ELSS etc. against dividends, short term capital gains on equity share/scheme and long term capital gains of any nature.
Balwant Jain is a tax and investment expert. He can be reached on firstname.lastname@example.org and @jainbalwant his Twitter handle