Introduction
Investing in foreign markets has always been an attractive option for investors looking for better returns. Recently, non-residents have shown increasing interest in the Indian share and securities market. This article delves into the income tax implications for these non-resident investors, especially concerning the need for filing tax returns.
Page Contents
Why Non-Residents are Investing in India
The primary motivation for non-residents funneling their savings into the Indian share market is the promise of higher returns on their funds compared to other global markets.
Income Tax Slab Rates for Non-Residents
We all know that non-residents irrespective of their age have one slab rate for payment of taxes in India which is as under:
| Taxable Income (Rs) | Tax Rate (%) |
|---|---|
| Less Than Equal to Rs. 2,50,000 | Nil |
| Between Rs. 2,50,000 To 5,00,000 | 5 |
| Between Rs. 5,00,000 To 10,00,000 | 20 |
| More Than Rs. 10.00,000 | 30 |
On the above tax rate applicable surcharge and cess are also applicable.
Benefits Under New Tax Regime for Non-Residents
Non-resident’s are also eligible to claim benefit of lower tax rate under the new tax regime u/s 115BAC which is as under:
| Total income | Rate of tax |
| Upto Rs. 3,00,000 | Nil |
| From Rs. 3,00,001 to Rs. 6,00,000 | 5 per cent |
| From Rs. 6,00,001 to Rs. 9,00,000 | 10 per cent |
| From Rs. 9,00,001 to Rs. 12,00,000 | 15 per cent |
| From Rs. 12,00,001 to Rs. 15,00,000 | 20 per cent |
| Above Rs. 15,00,000 | 30 per cent |
Surcharge and cess are also applicable on above mentioned tax rate.
Please note that the above tax rates are applicable for income earned in FY 2023-24 and onwards as before that there was a different tax rate under the new regime of section 115BAC of the Income Tax Act.
| Parameter | Description | Further Details |
|---|---|---|
| Prerequisite for Investment | D-mat Account Requirement: Non-residents must open a D-mat account in India. | This account facilitates the holding of shares in an electronic form, allowing for seamless trading and management of the portfolio. |
| Understanding Capital Gains | Nature of Gains: Capital gains are differentiated based on the holding duration of equity shares. | When an investor sells shares for a profit, the profit is termed as capital gain. The tax implications vary based on the duration the shares were held. |
| Classification as per Section 2 of Income Tax | – Short term: Shares held for 12 months or less. <br> – Long term: Shares held for more than 12 months. | Shares’ classification impacts the tax rates applicable. The differentiation helps in deciding whether the gains are short-term or long-term. |
| Taxability Consideration | Section 115AD Clarification: Regular individual shareholders aren’t covered under section 115AD. | This section is specifically for foreign institutional investors (entities investing large volumes in the Indian market). Individual investors, even if they are non-resident, are not categorized under this. |
| Institutional Registration | SEBI Registration Requirement: To be a foreign institutional investor, one must be registered with the Securities and Exchange Board of India (SEBI). | SEBI is the regulator for securities markets in India. Institutional investors need this registration to enjoy the specific tax provisions under section 115AD. |
| Sections Covering Normal Individuals | Sections 111A & 112A: For equity shares where STT (Securities Transaction Tax) is paid, individual taxability is under these sections. | – Section 111A: Pertains to short-term capital gains.
– Section 112A: Pertains to long-term capital gains. |
| Tax Rates | Determined by Holding Period: | – Short term (Section 111A): Gains are taxed at 15% + any applicable surcharge and cess. This means the total tax could be higher depending on the additional charges.
– Long term (Section 112A): Gains are taxed at 10% + applicable surcharge and cess. Given the longer holding period, the tax rate is comparatively lower. |
| Exemptions | Long-term Capital Gains Exemption: No tax for gains up to Rs. 1 lakh as per section 112A. | This exemption offers tax relief for smaller investors. While no tax is levied on gains up to Rs. 1 lakh, it’s essential to note that this amount is still considered part of the assessee’s total income for the year. |
Mandatory Tax Filing for Non-Residents
Now let’s discuss the interesting part which lead to the title of this post that if a non-resident invest any amount in share market and earns any amount of income he needs to file income tax return.
As per Section 139, an individual is not required to file income tax return if his or her total income does not exceed maximum amount not chargeable to tax.
Generally, it is the basic exemption limit of Rs. 2.5 lakh in case of individual but in case of non-resident individuals there is a difference.
If you read Section 111A and 112A you will find a difference in the treatment on resident individual and non-resident individual. Let’s discuss the same:
“Provided that in the case of an individual or a Hindu undivided family, being a resident, where the total income as reduced by such short-term capital gains is below the maximum amount which is not chargeable to income-tax, then, such short-term capital gains shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax“
Above proviso is from Section 111A of the Act and similar language is used in section 112A wherein it states that if total income of resident assessee excluding capital gain income falls short of basic exemption limit or maximum amount not chargeable to tax then such capital gain shall also be reduced from the remaining amount not chargeable to tax and then tax shall be calculated.
However, this benefit is not available to non-resident individuals.
What this means is if an individual non-resident even earn 1000 Rs. capital gain they will have to file income tax return because their income would be chargeable to tax u/s 111A as they won’t get any exemption limit benefit and accordingly as per Section 139 of the Act, for non-resident maximum amount not chargeable to tax would be Rs. 0.
Hence, if a non-resident earns any income from equity share trading during the year he will have to file income tax return as his income would be chargeable to tax. The only situation where non-resident might not have to file income tax return if the non-resident has only earned long term capital gain and total long term capital gain is below Rs. 1 lakh.
If a non-resident won’t file income tax return he will have to file income tax return along with late fees u/s 234F which can range anywhere between Rs. 1000 to Rs. 5000 depending on total income of assessee.
Conclusion
Non-residents keen on investing in the Indian share market must be well-versed with their tax obligations. While the prospects of higher returns are enticing, it’s crucial to understand the tax implications and ensure compliance with India’s Income Tax Act. Investing without knowledge can lead to inadvertent non-compliances and penalties.
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