Mrunal Paranjape* lives in the United States and invests her money in Mumbai in India. These are investments in bank deposits in India.
However, her bank is deducting TDS (Tax Deducted at Source) which is very high. She is also keen to expand her portfolio and diversify into mutual funds and property investment in India, but is unsure how much tax she will pay.
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She seems to be maintaining an NRO account which attracts TDS. She cannot save tax by filing form 15G which only resident Indians can file. The best way to save tax is by filing an annual return, and claim refund if the final tax payable is less than TDS.
What about mutual funds?
Indian tax rules encourage investments in equity-oriented mutual funds. As such, tax rates are lower for equity-oriented MFs. An equity-oriented mutual fund is one where the investments are 65% or more in domestic equity shares.
Long-term equity-oriented MFs (more than 12 months) are tax free. However short-term MFs attract capital gains tax of 15 percent.
However, non-equity-oriented mutual funds attract a higher capital gains tax of 20 percent after reducing indexed cost or at 10 percent after reducing actual cost without indexation, whichever is lower.
But the good news is – dividends from mutual funds are tax-free. But you will still pay a dividend distribution tax of 12.5 percent if you have invested in a non-equity oriented mutual fund.
What about property investment?
You can save tax if you use property investment as a long term asset – an asset that you own for more than three years. Such long-term property attracts a capital gains tax of 20 percent after reducing indexed cost from the sale proceeds, similar to mutual funds. However, you cannot use the 10 percent option like mutual funds.
What about tax in the United States?
Mrunal will have to pay tax in her host country – the United States – on all the income she earns in the US as well as outside US, which includes all the income from her investments in India.
* name changed on request
(Satyajit Banerjee is a Calcutta-based accountant specialising in NRI accounting. This article is for information only. Please consult an accountant for professional advice.)