Taxation on Foreign Exchange Assets
When talking of taxation on foreign exchange assets, there are two primary terms that we must pay attention to: (a) non-resident Indian and (b) foreign exchange assets. A clear understanding of the two are required to understand how taxes are applied on foreign exchange assets. Let us try and understand the two terms properly.
(a) Non-resident Indian: In this context, a non-resident Indian is:
- An Indian person who is not living in India. Simply put, the person is a citizen of India and born and brought up in India but later moved out of India.
- A person whose origins can be traced back to India and is not living in India. Simply but, this is a person who was never born in India and has never been a citizen of India but at least one of his or her parents was born and brought up in India and was a citizen of India before moving out of India.
(b) Foreign exchange assets: A foreign exchange asset is always related to a non-resident Indian. Foreign exchange assets refer to a list of various assets that were invested in or purchased or perhaps acquired by the non-resident Indian using convertible foreign exchange. A convertible foreign exchange is a liquid instrument (basically a currency), which can be sold easily or even bought easily without much restrictions from the government. This is extremely important because when assets are not purchased using convertible foreign exchange, i.e. they are purchased using local currency tax concessions are not allowed.
Talking of tax concessions, when a foreign exchange asset is purchased or invested in or is acquired using a convertible foreign exchange, the income accrued from those assets are taxed but with certain concessions.
Basically, whole income from such assets will first be calculated and normal income tax will applied. From the resulting tax amount, a certain percentage of concession will be deducted. The leftover is the net tax that the non-resident individual has to pay to Indian Government.
A natural question that follows: Which assets are considered as foreign exchange assets?
We mentioned earlier that only a few assets are listed as foreign exchange assets. These assets include:
- Shares of any Indian private sector or public sector company. This also includes any listed or unlisted entity.
- Debt instruments, specifically only debentures that are issued by Indian public sector companies only. Debentures from India private sector companies are not counted as foreign exchange assets.
- Any deposit made with a public sector company. Deposits made with private companies will not be counted as foreign exchange asset. Fixed deposits made with Indian banks are also considered as foreign exchange assets and no specific restrictions have been put on an entity being a banking company.
- Central government issued securities are considered as foreign exchange assets. Securities are actually debt instruments and even state governments can issue them. However, state government issued securities are not counted as foreign exchange assets.
So, any of the aforementioned four assets are eligible for tax concessions when they are purchased, invested in or acquired by a non-resident person.