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Photo: iStock (iStock)
Photo: iStock (iStock)

Residential status determines benefits you can get under DTAA

If your residential status for the relevant financial year is 'resident and ordinarily resident' in India, your entire income earned anywhere in the world shall be taxable in India

I had bought tax-free bonds from the secondary market. Upon redemption at the maturity date, I will be making a loss to the extent of the premium I make. The maturity date is four years away. Will the loss on premium be considered as long-term capital loss (LTCL) and can it be adjusted against any long-term capital gains (LTCG) that I might make in that financial year? I am a non-resident Indian (NRI). Will the tax treatment be different for me?

—Sudha

When tax-free bonds are held for a period of more than 12 months and sold before the maturity, the gains made are called LTCG. Such LTCG is taxed at the rate of 10% (plus additional cess and surcharge). In case a loss has been incurred, such loss can be set off from other LTCG.

I am a US citizen and an Overseas Citizenship of India (OCI) cardholder living in India on a long-term basis. For tax purposes, my status is ordinary resident. I am self-employed and receive income from consulting. In addition, I have investments in the US, which generate ordinary dividends, qualified dividends and capital gains. These investments are in non-retirement accounts and I have owned them for more than three years now. In the US, I report my India income and the income for the US investments. As my total income is below the foreign income exclusion threshold, and when standard deduction is considered, my dividends and capital gains don’t attract additional tax. I do pay self-employment tax on my India consulting income. How should the income from qualified dividends and capital gains from the US investments be reported in India and what are the applicable income tax rates? Is self-employment tax paid in the US deductible on India filing?

—SJ

If your residential status for the relevant financial year is “resident and ordinarily resident" in India, your entire income earned anywhere in the world shall be taxable in India. However, as far as tax laws in India are concerned, only the realized gains from your Individual Retirement Account (IRA) on the sale of shares and mutual funds will be taxable as capital gains in India. Dividend income will also be taxable in India. But unrealized capital gains are not taxed in India.

However, you need to identify your residential status as per the Double Taxation Avoidance Agreement between the two countries. This will determine which benefits of the treaty apply to you and where credits can be claimed for taxes paid. So it is best to seek some professional help with your tax filing.

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