Tax Exemption for NRIs

Tax saving for NRIs in India

Now Non Resident Indians can save Income tax and Capital Gains Tax by reinvesting in foreign exchange asset.

The reinvestment exemption under Section 115F of the Income Tax Act allows Non-Resident Indians (NRIs) to avoid paying tax on long-term capital gains (LTCG) from the transfer of specified foreign exchange assets, provided the proceeds are reinvested in eligible Indian assets. Details are below.

What are tax rates for NRIs under Section 115F?

Tax on Interest & Dividend : 20% of the Income.

Long Term Capital Gains : 12.5% of capital gains.

Features of Section 115F Reinvestment Exemption

1. Eligible Incomes (source must be foreign earnings)
2. • Income from foreign exchange assets (eg : Interest earned, Dividends earned)
   • Long Term Capital Gains from Foreign Exchange Assets
3. Eligible Foreign Exchange Assets
   The exemption applies to gains from transferring foreign exchange assets acquired in foreign currency (not with Indian rupees), such as:
   • Shares/debentures of Indian companies (Listed or Unlisted, Private or Public)
   • Central Government securities
   • Debentures or Bank deposits in Indian public companies.
4. Reinvestment Conditions
   • Time Limit: The net sale proceeds must be reinvested in eligible assets within 6 months.
   • Eligible New Assets: Reinvestment can be in:
     • Shares/debentures of Indian companies
     • Government securities
     • Specified bonds (e.g., NHAI/REC bonds).
     • Bank deposits in Indian public companies.
5. Income tax exemption for NRI
   • Full Exemption: If the entire net proceeds are reinvested, 100% of the LTCG is exempt from tax.
   • Partial Exemption: If only part is reinvested, the exemption is proportionate: An example below.
6. Lock-in period for reinvested assets.
   3 years lock-in on new assets. Tax benefit for NRI is available new asset is sold or converted to cash within 3 years, the exempted gain is added back to taxable income in the year of sale.

Example of full Reinvestment

Suppose an NRI sells a foreign exchange asset for Rs. 50 lakh (net sale proceeds) with a LTCG of Rs. 25 lakh:

• Reinvests the whole proceeds, i.e. Rs. 50 lakh in another asset or same asset.
• Exempt gain = Rs. 25 Lakhs
• Tax Payable = Rs. 0 (instead of Rs. 3.125 Lakhs)

Example of Partial Reinvestment

Suppose an NRI sells a foreign exchange asset for Rs. 50 lakh (net sale proceeds) with a LTCG of Rs. 25 lakh:

• Reinvests Rs. 30 lakh in another asset or same asset.
• Exempt gain = (30/50)*25 = Rs. 15 Lakhs
• Taxable gain = Rs. 10 lakhs (taxed at 12.5%).
• Tax Payable = 12.5% * 10 = 1.25 Lakhs (instead of Rs. 3.125 Lakhs)

Essentially, If an NRIs keeps re-investing the proceeds in cycles of 3 years. They need not pay any tax and can keep building the corpus. 

Summary:

This provision incentivizes NRIs by providing tax exemption to reinvest in Indian markets while simplifying tax compliance. Always consult a tax advisor to optimize outcomes based on individual circumstances.

Regards,

Honvest Team