11 Jul 2024In an era of global financial mobility, Non-Resident Indians (NRIs) often navigate the intricate waters of international taxation. A pivotal mechanism offering relief from the dual tax burden across borders is the Double Taxation Avoidance Agreement (DTAA). India, with DTAAs signed with 85 countries, ensures that entities are not taxed twice on the same income in both India and their resident country. This is particularly relevant for NRIs engaging in transactions involving stocks, properties, or mutual funds in India.
The essence of DTAAs lies in specifying the jurisdiction of taxation for various income types. For instance, mutual fund (MF) proceeds are taxable in India when the DTAA is with countries like the United States or the United Kingdom. Conversely, for nations such as Japan, Korea, and the UAE, taxation rights are reserved for the country of residence.
An intriguing facet of this arrangement is the potential tax exemption on capital gains from mutual funds in certain jurisdictions. Countries such as the UAE, Singapore, and Mauritius do not levy capital gains tax, allowing NRIs residing there to enjoy tax-free returns on MF investments made in India, contingent upon the stipulations of the relevant DTAA. It's worth noting that India imposes a capital gains tax ranging from 10% for long-term investments to 15% for short-term holdings, with a historical pause on long-term capital gains tax between 2004 and 2017.
The application of DTAA provisions extends beyond mutual funds to encompass shares and properties, often taxed in the Indian jurisdiction, and other financial instruments like bonds and derivatives, taxable in the resident country. However, conditions apply, including, in some cases, the requirement to repatriate the capital gains to the resident country to avail of the tax benefits.
For shares, the general rule under most DTAAs is taxation in India, with notable exceptions based on the shareholding percentage and the nature of the underlying investments. The scenario differs slightly for Portfolio Management Services (PMS) and Alternative Investment Funds (AIFs), where taxation is influenced by the investor's country of residence and the type of investment made.
Given the complexity of DTAAs and the potential for litigation, it is imperative for NRIs to engage with a qualified tax planner to navigate these regulations effectively. A thorough cost-benefit analysis, mindful of treaty shopping provisions, is essential to leverage DTAA benefits judiciously and compliantly.
This nuanced approach to international taxation underlines the significance of informed financial planning for NRIs, ensuring optimized tax implications on their investments across borders.