Here’s an explainer on how foreign investments are taxed for resident Indian taxpayers.
What qualifies as a foreign investment?
Foreign investment refers to money placed in assets or entities outside India.
According to CA Shefali Mundra, “This includes Foreign Direct Investment (FDI), where the investor owns 10% or more of a foreign company and has some control, and Foreign Portfolio Investment (FPI), which covers investments in foreign stocks, bonds or mutual funds without control.”
Both types are governed by the Foreign Exchange Management Act (FEMA). Regulatory updates are tightening the scrutiny on both direct and indirect foreign ownership.
Capital gains vs income tax
The tax treatment depends on the type of income generated:
Capital gains tax:
Short-Term Capital Gains (STCG) on listed foreign securities (held for less than 12 months) are taxed at 20% plus surcharge and cess.
Long-Term Capital Gains (LTCG) (held for 12 months or more) are taxed at 12.5% plus surcharge and cess.
Income tax:
Interest and dividends from foreign assets are taxed as per your income tax
slab, going up to 30% for individuals in the highest bracket.
“Tax implications vary depending on whether India has a Double Taxation Avoidance Agreement (DTAA) with the country of investment,” explains CA Shefali Mundra. If a DTAA exists, it may allow for tax credits or exemptions. If not, relief may be sought under Section 91 of the Income Tax Act.
How to report foreign income and assets?
Foreign investments must be reported in ITR-2 or ITR-3, depending on the nature of your income. Key schedules to fill include:
Schedule FA: Disclose foreign assets such as bank accounts, shares, and real estate.
Schedule FSI: Report income from foreign sources.
Schedule TR: Claim tax relief for foreign taxes paid.
Accurate reporting is mandatory under Indian tax law.
DTAA: Benefits and challenges
Claiming DTAA benefits can be tricky. Investors often struggle with:
- Understanding treaty clauses,
- Obtaining and submitting Tax Residency Certificate (TRC),
- Filing Form 10F, and
- Meeting procedural deadlines.
“Missing documentation or incorrect application of DTAA provisions can lead to denial of benefits or higher tax deductions,” warns CA Shefali Mundra.
Avoiding double taxation
To reduce tax burden, use the DTAA provisions effectively. This may involve:
- Claiming foreign tax credit,
- Availing exemptions for specific incomes,
- Ensuring timely documentation.
CA Shefali Mundra advises, “To minimise double taxation risk, maintain proper records and consult professionals well-versed in international tax compliance.”