All about tax implications of overseas investments

When the RBI liberalised global investment norms, it literally opened up a world of choices for wealthy Indians. They could invest in immoveable property, shares, bonds, debentures, mutual funds, listed and unlisted debt securities, and other financial instruments outside India. The new norms and the urge for geographical diversification have led many Indians to invest in foreign markets.

However, there are no tax-free luxuries from such investments for these may invite tax both in India and abroad. In fact, the tax implications in some cases can be quite complex. In addition, tax implications in the foreign country where the investment is to be made should also be analysed.

TAX ON CAPITAL GAINS Under the Indian tax laws, a resident and ordinarily resident of India is taxed on his worldwide income. This includes capital gains, rental income and income from other sources. If the transaction involves sale of shares listed on the overseas stock exchanges or other assets (gold, property) outside India, the income is treated as capital gains.

These can be either short-term or long-term gains, depending on the period of holding.
If the asset is held for more than 12 months (in the case of shares or units) or 36 months (in any other case), the income is classified as a long-term capital gain. If the holding period is shorter, the gains are treated as short term.

While most types of incomes from foreign investments are treated in the same way as those from domestic investments, the crucial difference is in the way long-term capital gains from stocks and equity funds are taxed. If an investor holds domestic equities for over a year, there is no tax on the capital gains if the stocks were bought through a recognised stock exchange. However, there is no exemption on profits from foreign equities and an investor will have to pay 20.6% tax on the gains.

CARRYING FORWARD LOSSES The good part is that these long-term capital gains from foreign equities can be adjusted against long-term capital losses. There's a caveat here: long-term capital losses can be set off only against long-term capital gains. In case of short-term losses, they can be set off against both short-term and long-term gains.
If the loss cannot be completely set off, it can be carried forward.

The tax laws allow carrying forward of losses incurred in overseas investments, including long-term losses from equities, for up to eight consecutive years. What's more, the cost of acquisition can also be adjusted for indexation to account for inflation during the period of holding. The same rules of indexation that govern domestic assets are applicable to foreign investments.

SAVING CAPITAL GAINS TAX Global investments can also be a source of saving tax. Under Section 54, one can claim exemption from tax on capital gains earned from the sale of a residential property by reinvesting the proceeds in another house within a specified period. This can be a house in a foreign country as well.

Investors can deposit the proceeds in the capital gains account scheme before the due date of filing the income tax return for that year, provided the money is re-invested in another property within three years of the date of sale of the original property. Any money lying unutilised in the capital gains account at the end of three years would become taxable.

TAX ON RENTAL INCOME The rental income from overseas property gets the same treatment as that from domestic real estate. After a 30% standard deduction and municipal taxes paid for the property, the rental income is added to the income of the owner and taxed at the normal rate. Deduction can also be claimed for interest paid on housing loan during the financial year.

The rules don't change much when it comes to income from other sources as well. The dividends from mutual funds and stocks are also fully taxable, along with the interest income earned on bonds and deposits.

These tax provisions in India are set for a big change with the Direct Taxes Code (DTC) likely to be introduced from 1 April 2012. The DTC proposes to remove the distinction between long-term and short-term assets and change the way the holding period is calculated for indexation benefits. The standard deduction for rental income will also be reduced from the present 30% to 20%.

AVOIDING DOUBLE TAXATION The taxability of foreign investment also depends on the tax laws of that country. There is some relief for the investor if there is a tax agreement between India and the other country. In the case of double taxation, the investor can seek relief under the Double Taxation Avoidance Agreement (DTAA) between India and the country concerned.

However, this could vary and depends on the nature of income, tax laws in the overseas country and the provisions of the agreement between India and that country. India currently has DTAA with more than 80 countries, including the US, the UK, France, Greece, Brazil, Canada, Germany, Israel, Italy, Mauritius, Thailand, Spain, Malaysia, Russia, China, Bangladesh and Australia.

If one satisfies the conditions mentioned in the respective DTAA, credit can be claimed for the taxes paid overseas on such income against the Indian tax liability. The tax credits are calculated as being lower of the actual taxes paid overseas and the Indian tax liability, and should be claimed in the income tax return form under 'Relief under Section 90.'

Overseas investments also have wealth tax implications. There is a 1% wealth tax on the net wealth exceeding Rs 30 lakh. Currently, only a second property, jewellery and other unproductive assets are taken into account while calculating the wealth tax. However, after the DTC comes into force, the foreign shares in one's portfolio will also be included in the ambit of wealth tax.

Source: http://economictimes.indiatimes.com/personal-finance/tax-savers/tax-news/all-about-tax-implications-of-overseas-investments/articleshow/9756753.cms?curpg=2