An increasing number of Indians have started investing directly in foreign assets like shares, immovable properties, etc. as they provide an interesting avenue for diversification and potentially higher returns due to the added benefit of foreign exchange fluctuation.
The monetary limits and manner of making offshore investments are governed by the regulations framed by the Reserve Bank of India under the Indian exchange control laws.
However, any decision to make such investments would also need to be examined taking into consideration the Indian income-tax implications as applicable. This article provides an overview of the Indian tax aspects and costs to be borne in mind when planning offshore investments by Indian resident individuals.
Income earned by Indian tax residents from their investments in foreign assets would be taxable in India unless specifically exempted under the Indian Income-tax Act (‘Act’). Such income may also be taxed as per the domestic laws of the jurisdiction where investments are made.
However, the taxability in the foreign jurisdiction would be subject to their local laws and the provisions of India’s tax treaty with the relevant jurisdiction. The Act provides for grant of credit of any tax paid in the foreign jurisdiction against the Indian tax liability on such income to mitigate double taxation of the same income.
From an Indian tax perspective, investors need to bear in mind that Indian law contains certain fair value requirements which are applicable at the time of acquisition of property such as shares, immovable property, etc.
If an investor acquires shares, immovable property, etc. at less than their fair market value, then the difference in the fair value and price paid for such acquisition will be subject to tax in the hands of the investor at the slab rates applicable to him/ her. Indian tax laws contain specific valuation rules for determining the fair value of such assets. However, there may be some practical challenges in determining the fair values of assets located in an offshore jurisdiction.
As per Indian tax laws, gains arising from the transfer of immovable property held for 24 months or less, are taxed as short-term capital gains at the applicable slab rates. Long-term capital gains arise when shares / immovable property are held for more than 24 months. Such gains are taxed at 20% plus applicable cess and surcharge. Investors would also get the benefit of Cost Inflation Index (‘CII’) to adjust the purchase price for inflation which will reduce the investor’s tax liability.
Dividends earned from foreign shares are taxed under the head “income from other sources”. Dividends received from a foreign company will be included in the total income of the taxpayer and will be charged to tax at the rates applicable to the individual taxpayer. A credit for the tax withheld or paid in the foreign country under the applicable tax treaty would be available in India subject to certain limitations. Rental income earned from overseas immoveable properties would also be subject to Indian tax as income from house property.
Where the investment was made before April 1 2023 long-term capital gains (where unit of such fund is held for more than 36 months prior to transfer) shall be subject to tax at the rate of 20% (plus applicable surcharge and cess); else gains from redemption or sale of Indian mutual funds which invest in global markets are taxed at the slab rates applicable to the investor.
In addition to details of their income, Indian residents investing in offshore jurisdictions are required to report their foreign assets in Schedule FA of the annual income tax return. Failure to do so would result in applicable penalties and prosecution. Form No. 67 must be furnished in order to claim credit for foreign taxes.
It is essential to maintain accurate records of all transactions, including purchase and sale of assets in order to maintain compliance with Indian tax and regulatory requirements. Investors should also examine their tax liability and reporting requirements in the foreign jurisdiction under the applicable domestic tax laws and the tax treaty. For larger investments, investors may also explore opportunities to invest through offshore holding structures in order to optimise costs and achieve tax efficiency subject to compliance with applicable laws in this regard.
(Authors are Suraj Shetty Partner and Tejasvi Shukla, Associate at J Sagar Associates)
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