Though overseas investments offer good diversification opportunities, the tax implications should not be ignored.

While building a portfolio, most investors think of diversification across assets and geography with an objective to spread risk and maximise returns.

Diversified portfolio may mitigate the risk, but it comes along with tax complexities.

Under the Indian tax laws, every resident and ordinarily resident is taxed on his worldwide income.

Typically, an investor would earn capital gains on sale/exchange of shares/stock listed on overseas stock exchange or other capital assets such as gold, property; interest income on securities and rental income on immovable properties situated abroad.

Capital Gains

Capital gains are taxed depending on the period for which the asset has been held. The gains arising on sale of an asset held for more than 12 months (in case of shares or units) or 36 months (in any other case), are treated as long-term capital gains (LTCG) and taxed at the rate of 20.60 per cent. Whereas the gains arising on sale of assets held for a shorter period are treated as short-term capital gains (STCG) and taxed at the applicable slab rates.

Further, in case of long-term capital asset the investor is eligible to claim indexation on the cost of acquisition (as application to domestic investments) to account for the inflation.

On the other hand where there is a loss on sale of long-term capital assets held abroad, the same is eligible for set-off against the gains earned on sale of long-term capital assets held in India and vice-versa.

Where there is a loss on sale of short-term capital assets held abroad, the same is eligible for set-off against the gains earned on sale of long-term as well as short-term capital assets held in India and vice-versa.

Rental and Interest Income

Dividends, interest income and rental income from house property outside India would be taxable in India under the normal tax provisions at the applicable slab rates.

Further, in case of purchase of a house property outside India, the benefits of repayment of principal loan taken from specified financial institutions are eligible for claiming deduction under section 80C and the interest on loan is eligible for claiming deduction under section 24(b), subject to certain conditions.

Other benefits

Tax arising on capital gains derived from foreign investments can be saved by reinvesting (subject to certain basic conditions) the capital gains/sales proceeds for purchase of a residential house property or investment in NHAI/REC bonds (restricted to Rs 50 lakh per financial year)

The taxability of income from foreign investments would also depend on the tax laws prevailing in foreign country. However, the investor may be eligible for certain relief in case there is a double tax avoidance agreement between India and the country concerned.

While the increasing disposable income and liberalised foreign exchange regulations make a good investment opportunity, the consequential tax implications should not be ignored. The investors should examine the tax implication and take informed decisions.

(The writer is Partner, Tax & Regulatory Services, BDO India.)

(This article was published on August 25, 2012)
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