Synopsis: The Indian investors who are seeking global diversification, at present have two options, one being direct overseas investing via the Liberalised Remittance Scheme (LRS) and other being investment through GIFT City’s International Financial Services Centre (IFSC). But the tax implications of each route is critical for making informed investment decisions.
Depreciating Indian rupee and the global growth has led many Indian investors to diversify their portfolio by including global assets, either, by remitting money abroad directly under LRS to invest in foreign markets or routing investments through GIFT City which is India’s International Financial Services Center (IFSC) in Gujarat. While both routes offer global exposure, their tax implications on investors differ, hence understanding both will propel the investors to make informed decisions.
Taxes for Indian Investors in Direct Global Investing
When investments are made directly in foreign markets by the Indian investors, then the tax rules are applicable under the Income Tax Act, 1961, which are:
- Capital Gains Tax:
- LTCG is 12.5% gains which are taxed under Section 112.
- The shares of those companies that are not listed on a recognised Indian stock exchange and if held for more than 24 months according to the Section 2(42A), are classified as long-term.
- Short-term capital gains (STCG) is applicable for holdings less than or equal to 24 months, and are taxed according to the investor’s applicable income tax slab rate.
- Dividend Income- Dividends from the foreign investments are taxed under “Income from Other resources” and is as per the marginal tax slab rate.
- Tax Collected at Source (TCS) on Remittances:
- The TCS threshold under LRS is ₹10 lakh and remittances up to this limit are TCS-free. For amounts exceeding this, TCS applies at 5% for education and medical remittances, and 20% for other purposes (including investment remittances).
- TCS is adjustable against final tax liability when filing the ITR.
- Reporting & Compliance:
- Resident investors holding foreign assets must file ITR-2 applicable for individuals and ITR-3 for business and professional income.
- Declare under Schedule FA, Schedule FSI, Schedule FSI for foreign assets, foreign income and capital gains from foreign respectively.
- Misreporting may invite a penalty of up to ₹10 lakh per year, and per default.
Taxes for Indian Investors Through GIFT City
GIFT City-IFSC is considered as a “foreign jurisdiction” for financial purposes under FEMA, 1999, and offers a preferential tax regime under the Income Tax Act, which are following:
- Capital Gains:
- Tax exemptions for transactions within GIFT IFSC, which includes transfers of certain securities and derivatives, are applicable depending on the structure and instruments used.
- Capital gains on after redemption for specified funds are exempt under Section 10(4D) and for NRIs, capital gains on IFSC-listed instruments are exempt.
- Transaction Taxes- Transactions which are made on IFSC exchanges are free of Securities Transaction Tax (STT), stamp duty, and GST.
- Dividend Income- Dividend income earned from investments in GIFT City by eligible non-residents is taxed at only 10%, which makes it further more attractive.
- Interest Income- Tax exemption on the interest income from foreign currency deposits held in IFSC banking units.
- Business or Fund Income Tax Holiday- Income tax exemption for any 10 consecutive years within a 15-year window for all the eligible businesses in GIFT IFSC.
- LRS Limit Applies to Residents- The LRS limit is set at $250,000 per financial year and applies to resident investors investing through GIFT City.
Also Read: GIFT City Investments: How to Invest in Global Mutual Funds Through GIFT City
Table Comparison of Direct Global Investing and Gift City
Conclusion
GIFT City offers meaningful tax advantages for Indian investors over direct LRS-based overseas investing especially on capital gains, dividends, and transaction taxes. However, the right choice depends on the investor’s residency status, the preferred investment size, and the specific instruments used, and taking professional tax advice is essential before committing capital.
Written by Jahnavi
