I am based in the UAE and have sold mutual funds and listed shares over the past year with gains of about ₹16 lakh. I have obtained TRC (taxation residency certificate) from the UAE tax authorities. TDS (tax deducted at source) has been deducted on both sales. An NRI (non-resident Indian) friend told me that I cannot avail the treaty concession because of a change in Indian income tax laws in 2020 since my income from sale is more than ₹15 lakh? Is this correct?
—Name withheld on request
The Finance Act 2020 brought about some changes in tax laws for Indian citizens residing abroad. Two important changes that refer to the threshold of ₹15 lakh relate to (a) Indian citizens visiting India; and (b) Indian citizens not paying taxes anywhere across the world, respectively.
The first change lowered the threshold for Indian citizens staying outside India and coming to India on a visit, to qualify as non-residents, if their Indian income exceeds ₹15 lakh. The second change targets Indian citizens earning more than ₹15 lakh from Indian sources while residing in countries where they have no income tax liability.
If you qualify as a tax resident of the foreign country, upon application, the tax authority of that nation would usually issue a Tax Residency Certificate (TRC) quoting the respective DTAA (Double Taxation Avoidance Agreement). In your case, since you have obtained TRC from the UAE tax authorities, it is presumed that you are eligible to access India-UAE DTAA benefits. The provisions of the DTAA override provisions of domestic tax laws to the extent of inconsistency.
Because of the Finance Act 2020 amendments, if you become a resident under the Indian tax law, you may apply the tie-breaker tests provided under the India-UAE DTAA to determine the treaty residence in your case. The tie-breaker tests are a series of chronological tests that need to be run in order to break the tie in favour of one of the two countries, both of which claim tax residence under its domestic tax laws for the subject person.
The sequence of tests is as follows: (1) possession of permanent home in the country; (2) country where your personal and economic relations are closer; (3) country in which you have a habitual abode; (4) nationality. In your case, if the tie breaks are in favour of the UAE, then you can apply the provisions of the India-UAE DTAA as if you are a tax resident of UAE, notwithstanding the amendments made vide Finance Act 2020.
Under the India-UAE DTAA, India has been allocated the right to tax capital gains arising from the sale of shares, whereas India does not have the right to tax capital gains arising from redemption of mutual funds. In conclusion, you can avail treaty concessions for capital gains on mutual funds.
Harshal Bhuta is a partner at chartered accountancy firm P.R. Bhuta and Co.
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Published: 17 Jun 2024, 07:01 PM IST