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Dividend earned by NRIs is taxable in India

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Effective FY21 and onwards, any dividend income from shares of an Indian company is taxable in India. If a shareholder qualifies as a ‘non-resident’ in India under the India income tax law, the dividend income is taxable at 20% plus applicable surcharge and 4% health and education cess on gross basis.

My son runs a business abroad and lives there. He has a non-resident Indian (NRI) account and invests in fixed deposits (FDs) in banks and equities of Indian companies. What taxation rules will apply to him? What amount of annual profit is under the taxation limit? How will the dividend he gets each year be taxed? Is there any exemption limit on the taxable interest earned on bank FDs?

—Name withheld on request

It is assumed that your son has non-resident external (NRE) and non-resident ordinary (NRO) bank accounts (savings and fixed deposits) in India. Any interest earned from an NRO bank account will be taxable in India. But, if your son is a ‘resident’ of the other country and the tax residency certificate is available from the income tax authorities of the other country, the interest income may be subject to a lower tax rate as per provisions of the double taxation avoidance agreement between India and the other country.

Alternatively, a deduction under Section 80TTA may be available up to 10,000 on the interest earned from savings bank accounts. Interest income from NRE accounts (savings and fixed deposits) is exempt from tax in India, provided your son qualifies as a “person resident outside India" under the exchange control law.

Effective FY21 and onwards, any dividend income from shares of an Indian company is taxable in India. If a shareholder qualifies as a ‘non-resident’ in India under the India income tax law, the dividend income is taxable at 20% plus applicable surcharge and 4% health and education cess on gross basis. The applicable tax rate on dividend income for a non-resident ranges between 20.8% and 28.5% depending on the level of total income and applicable surcharge. Thus, the dividend income earned by your son in India will be taxable in India at 20% plus applicable surcharge and 4% health and education cess on gross basis.

Any income arising from the sale of shares listed in a recognized stock exchange in India will be taxable as capital gains. As dividend income and capital gains are taxed at special rates, the threshold exemption of 2.5 lakh is not available for non-residents on such incomes. However, interest income from FDs and savings bank accounts (after claiming a deduction up to 10,000 on the interest income from savings bank accounts) will be taxable only if it exceeds the threshold exemption of 2.5 lakh.

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

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