Foreign investments are taxed on the basis of residential status
The taxability of an individual is dependent on his residential status, which is determined on the basis of his physical presence.
INVESTMENT AVENUES The permissible investment avenues include investment in foreign securities, acquisition of immovable property outside India and deposits with banks outside India, subject to local laws of such countries.
Under the Income-Tax Act, 1961, the taxability of an individual is dependent on his residential status, which is determined on the basis of his physical presence (number of days) in India during the relevant financial year and, in certain cases, the preceding four years. A resident individual is subject to tax on his global income in India subject to the foreign tax credit on taxes paid outside India. As such, income from foreign investments would generally be liable to tax in India. In case of non-residents, such an income is not liable to tax as long as it is not directly received in India.
FOREIGN INCOME: Investment overseas will generally fetch income in the form of dividends, interest, rental income from house property, and capital gains on liquidation of assets. Dividends, interest income and rental income from house property outside India would be taxable in India under the normal tax provisions. India has an extensive arrangement with about 80 countries for avoidance of double taxation, referred to as the Double Tax Avoidance Agreements (DTAAs) under which certain relief may be available.
The foreign tax credit paid in the source country shall be available as a deduction against the Indian income-tax liability of the individual, subject to some conditions. India gives unilateral tax credit to its residents in respect of foreign income even if there is no DTAA between India and the country concerned.
The taxability of capital gains is dependent on the period of holding of the foreign asset based on which an asset is classified as either long-term or shortterm capital asset. To qualify as long-term capital asset, the period of holding in case of shares of a foreign company should be over 12 months, whereas for other foreign securities and immovable property, the period of holding is over 36 months. The cost indexation benefit shall be available on such foreign assets. Short-term capital gains are taxable at 30% and long-term capital gains at 20%.
DEDUCTION ON INVESTMENT: Under section 80C and 80 CCF of the I-T Act, an individual investor can avail of tax deduction up to.`1,20,000 when investments are made in certain specified taxsaving instruments. However, there are no specific tax benefits available under section 80C/80CCF of the I-T Act in case of foreign investments. On the other hand, in case of purchase of a house property outside India, the benefits of principal loan deduction u/s 80C and the interest on house property loan under section 24(b) in case of loans obtained from specified financial institutions shall be available, subject to certain conditions.
For an Individual having foreign investment, capital gains shall be exempted for reinvestment of capital gains/sales proceeds u/s 54 (purchase of a residential house property), u/s 54EC (investment in NHAI/REC bonds up to .`50 lakh) and section 54F (investment of sale proceeds of long-term capital assets), subject to certain conditions.
DIRECT TAX CODE
The new Direct Tax Code (DTC) Bill 2010 proposes to replace the present I-T Act and the wealthtax Act, 1957, with effect from the financial year commencing April 1, 2012. The draft DTC bill provides that for wealth tax purpose, the bank deposits of an Individual outside India as well as any equity or preference shares held by a resident in a controlled foreign company shall be charged to wealth tax at 1%.
(Suresh Surana , founder of RSM Astute Consulting Group)