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The income tax laws have some special provisions to attract NRIs (Non Resident Indians) to make investments in foreign currency in India. 

Situations when these provisions will apply

These provisions which are optional apply to income of non-resident Indian citizens or Person of Indian Origin (PIO). An person is treated as PIO if he or either of his parents or grandparents were born in undivided India. We will refer to both the categories of Individuals as Non Resident Indians (NRIs).

These provisions apply for investment income and Long Term Capital Gains (LTCG) of an NRI for some specified investments where the money has come in foreign currency. These include shares of all Indian companies whether listed or not or whether private company or a public limited company. Debentures or deposits made with any all Indian companies except with a private limited are also included in eligible investments. All the securities issued by central government also qualifies under these special provisions.

It may be noted that these provisions apply only if the investments have been made by the NRI himself. So for asset inherited or received as gift by an NRI are outside this scheme.

Benefits under this scheme

An NRI can claim exemption in respect of Long Term Capital Gains (LTCG) on the eligible assets if he invests the sale consideration received to acquire any of specified assets within six months from date of sale. The exemption available will be proportionately reduced if full consideration is not invested. Similar exemption is not available to a resident taxpayer in respect of LTCG on financial assets by reinvesting in any other financial asset. This exemption option makes this scheme very attractive for an NRI. The newly acquired assets purchased to claim the LTCG exemption has to be retained for a minimum period of three years else the LTCG exemption claimed earlier gets reversed and taxed as LTCG in the year of sale/transfer of the newly acquired assets.

An NRI availing this scheme is exempted from filing his Income Tax return (ITR) in India if his income comprises of investment income and LTCG on these assets and proper tax has been deducted at source on such income. It may be noted that these conditions apply only for availing exemption from filing of ITR and not for availing benefits under this scheme. So in case the NRI has any other income in addition to the investment income and LTCG on these asset, he can still avail the exemption of LTCG but will have to file his ITR here in India.

The NRI is allowed to continue to avail the benefits under this scheme even after he becomes a resident under the tax laws as long as he holds these assets in his name.

How the LTCG are to be computed?

The holding period requirement of these assets and the manner in which the capital gains are to be computed are similar to those applicable for the resident taxpayers except for manner of computing the LTCG for investments in shares and debentures of Indian Companies made in foreign currency. For investments made in shares and debentures of Indian companies by an NRI in foreign currency, the LTCG are computed without giving the benefit of indexation. However, such LTCG are to be computed by converting the cost of acquisition as well as the sale consideration in the same foreign currency in which investment was purchased. The profits computed in foreign currency are then reconverted into Indian rupees to arrive at taxable LTCG. So effectively the foreign currency gains made on such investments are eliminated and only the real capital gains are taxed.

Tax payable for different assets under these provisions

LTCG on all these assets are taxed at flat rate of 10% under this scheme whereas the investment income from these assets and other LTCG are taxed at flat rate of 20%. Deduction under Chapter VIA is also not available to an NRI against LTCG and investment income. However, the NRI is eligible to claim deductions under chapter VIA against other income except the income on which tax at flat rate is applicable. Other income is taxed at regular slab rates.

Balwant Jain is a tax and investments expert and can be reached on jainbalwant@gmail.com

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