Dividends from NRIs are taxable in India

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My son runs a business abroad and lives there. He has a non-resident Indian (NRI) account and invests in time deposits (FDs) with banks and stocks of Indian companies. Which tax regulations apply to him? What annual profit is below the tax limit? How is the dividend he receives each year taxed? Is there an exemption limit for taxable interest earned on bank FDs?

—Name withheld upon request

Your son is assumed to have non-resident external (NRE) and non-resident ordinary (NGO) bank accounts (savings and fixed-term deposits) in India. All interest earned from an NGO bank account is taxable in India. However, if your son is “resident” in the other state and has tax residence certificate from the income tax authorities of the other state, the interest income may be subject to a lower tax rate under the double tax avoidance agreements between India and the other country.

Alternatively, a deduction under Section 80TTA can be up to 10,000 on the interest from savings bank accounts. Interest earned on NRE accounts (savings and fixed deposits) are tax-free in India, provided that your son qualifies as a “non-Indian resident” under the Foreign Exchange Control Act.

As of FY21, all dividend income from shares in an Indian company will be taxable in India. If a shareholder is considered a “non-resident” in India under Indian Income Tax Law, gross dividend income is taxable at 20% plus applicable surcharge and 4% of health and education expenses. The applicable tax rate on dividend income for a non-resident is between 20.8% and 28.5% depending on the total income and the applicable surcharge. Thus, the dividend income earned by your son in India is taxable in India at 20% plus the applicable surcharge and 4% of the health and education fees.

All income from the sale of stocks listed on a Recognized Stock Exchange in India is taxable as capital gains. Since dividend income and capital gains are taxed at special rates, the tax exemption of 2.5 lakh is not available to non-residents with such incomes. Interest income from FDs and savings banks (after claiming a deduction up to 10,000 on the interest income of savings banks) are only taxable if they exceed the tax exemption of 2.5 lakh.

Sonu Iyer is a tax partner and head of HR at EY India.

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