NRIs must factor in tax while buying assets in India
By Nishant Thakkar
Under the Income-tax Act, 1961 (Act), gains earned from transfer of all foreign assets are taxable for residents in India. For non-residents, only assets situated in India or those deriving more than 50% of their value from assets in India are taxable. India has also entered into agreements with several countries to divide taxing rights [Double Tax Avoidance Agreements (DTAA)]. In cases where India has entered into such agreements, the taxing rights are governed by their provisions.
While DTAA provisions are usually invoked by non-residents, in some cases even residents can take shelter under DTAA – for instance, if a resident of India acquires a villa in Austria, gains from its sale may be exempted from tax in India under the DTAA.
Gains derived from the transfer of any capital asset is ordinarily the excess of “full value of consideration” (FVC) over the “cost of acquisition” (COA). For short-term capital assets, the gain is subject to taxation at the applicable normal rate, such as the slab rates for individuals. On the other hand, for long-term capital assets, it is generally taxable at a base rate of 20%. However, these rates are subject to any beneficial rates provided under the DTAA.
The Act grants exemption on reinvestment of long-term capital gains obtained from the transfer of a foreign asset. Exemption eligibility depends on the type of asset sold and the nature and extent of reinvestment. For instance, if an individual reinvests the entire gains arising from the transfer of shares of a foreign firm (a long-term capital asset) in acquiring a residential house in India, the gains (subject to conditions contained in the relevant section) will be exempt from taxation in India.
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