mint Here’s an overview of who can claim certain benefits, which assets are eligible, and the timing involved.
Types of Income Eligible for Concessions
Concessions are applicable to two main categories of income.
“Special tax provisions are relevant for income generated from foreign exchange assets. This includes interest, dividends, and long-term capital gains (LTCG) from these assets,” an expert noted.
However, Laxmi Ahirwar from Pr Bhuta & Co clarified that NRIs cannot take deductions specified in Chapter VI-A (sections 80C-80U), stating that even the indexation benefits for LTCG aren’t available.
Forex Assets
The term forex assets directly connects to the source of funds. “Assets bought with convertible foreign exchange are categorized as foreign exchange assets. This includes shares issued by Indian companies, public company debts, and government securities,” she explained.
Mehta elaborated: “When you transfer US dollars into a non-resident external (NRE) account, those funds get converted into INR prior to deposit. If you then use those funds to invest in shares, they qualify as foreign exchange assets under special tax provisions.”
Funds Transferred from NRO to NRE
Ahirwar mentioned that usually, funds transferred via NRE accounts enjoy concessional tax treatment under sections 115C to 115I of the Income Tax Act, provided the investment is made with foreign remittances. Conversely, investments using NRO account funds are generally excluded, as these consist of income earned domestically.
Confusion often arises during transfers from NRO to NRE accounts using Forms 15CA and 15CB. Despite this being allowed under the Forex Control Act (FEMA), Ahirwar stated that simply transferring funds does not guarantee tax concessions. The original source of those funds must have been remitted in convertible foreign exchange and not generated locally.
“This area frequently leads to legal disputes,” Duckwhirwar remarked, noting that tax authorities might seek proof that investments stem from genuine foreign exchange inflows, not Indian income.
Even if the funds sit in an NRE account, it’s essential to establish a clear origin trail.
Ahirwar emphasized that judicial rulings stress the significance of sourcing funds over the type of bank account used. Therefore, taxpayers should keep supporting documents like bank transfer receipts and foreign inward transfer certificates to validate their claims for concessional tax treatment.
Tax Rates Based on These Regulations
According to Section 115E, there’s a fixed tax rate applied on a total basis. Mehta mentioned, “For investment income, the special tax rate stands at 20%, while LTCG is taxed at 12.5%. These rates apply in total, with no deductions or indexing benefits available.”
For NRIs opting to reinvest LTCG, Mehta added:
“If the cost of a new forex asset is below the net sales amount, the exemption is calculated proportionally. A three-year lock-in applies to new forex assets.”
“Should a new asset be sold within three years, any previous exemption will be taxed in the year of that transfer.” he further explained.
For instance, Mr. A sells stocks that qualify for foreign exchange assets, realizing an LTCG of ₹2 lakhs on a ₹10 lakh sale. Under Section 115E, this LTCG faces a standard tax of 12.5%. However, if Mr. A reinvests the total net sale within six months into another qualifying asset, the LTCG may be exempt.
Yet, if Mr. A only reinvests ₹8 lakhs of the ₹10 lakh from the sale, the exemption is calculated proportionally. This means, based on (₹2 lakhs / ₹10 lakhs) multiplied by ₹8 lakhs, ₹1.6 lakhs could be exempt. The remaining ₹40,000 would be taxable.
Moreover, any new forex assets bought with the reinvested sum must adhere to the mandatory three-year lock-in rule. If an NRI sells or transfers this asset before three years, the previous tax exemption will be revoked and taxed in the year of transfer. This ensures reinvestment remains valid for a minimum duration to qualify for the exemption.
Continuous Tax Exemption
Even after the initial three-year lock-in, NRIs can still benefit from the LTCG exemption as long as they reinvest the sale proceeds into eligible assets within the specified timeframe. “These LTCG exemptions needn’t be a one-off advantage,” stated chartered accountant Gautam Nayak. “If sales proceeds are reinvested in the designated assets within six months, and those are held for the required period, the exemption can be extended indefinitely with each reinvestment.”
This reinvestment must happen within six months post-sale of the designated assets.
Nayak pointed out that keeping accurate documentation is crucial in these cases. “NRIs have to show that the initial investment was made using convertible foreign exchange, and that every reinvestment complies with the Income Tax Act.”
Without clear documentation on funding sources and asset qualifications, exemption claims may falter during review.
For example, if an NRI invests ₹2,00,000 in stocks using funds from NRE accounts, and a year later that investment grows to ₹40 lakhs, to claim the capital gain exemption, ₹4,00,000 needs to be reinvested in another qualifying forex asset within six months.
If the value appreciates further after maintaining the new asset for the required three years, that exemption is preserved when selling again at ₹60 lakhs. If the entire ₹60 lakhs are reinvested in eligible assets within six months, the reinvestment and exemption cycle can persist as long as the NRI adheres to reinvestment schedules, asset eligibility, and documentation obligations.
After Returning to India
Even after NRIs return to India and attain residency, they might still benefit from these concessions under certain conditions. “A returning NRI can maintain these special investment income provisions by submitting a declaration to the tax assessor,” she noted.
“If an NRI becomes a resident in the subsequent years, they can still file a return with a written declaration, requesting that the special tax provisions remain applicable to profits from foreign exchange investments,” Ahirwar added.
