Nov 8, 2011

International Investing - The Income Tax perspective

International Investing - The Income Tax perspective

While deciding on an investment, one should take cognizance of the income tax that one would need to pay at the time of redeeming the investment at a profit.

Under the Income Tax Act, 1961, a resident individual has to pay tax on his income irrespective of the same being derived through domestic avenues or from outside the country. The income from investing in instruments that in turn invest abroad is therefore taxable as capital gains. The definition of Capital gains remains the same i.e. if an asset is held for more than 12 months in the case of shares or mutual fund units, or 36 months in any other case, the profit incurred on the sale of the asset would be computed as long-term capital gains. The profit from any assets held for less than the prescribed limit of 0 � 12/ 36 months is treated as short-term capital gain.
With reference to mutual funds investing in foreign securities but domiciled in India, these are treated as non-equity funds and taxed accordingly. Thus long-term capital gain i.e. profit booked after one year of investment would be taxed at 10% without indexation and 20% with indexation. Short-term capital gain would be taxed as per an individual�s tax slab, the highest being 30%. However, if your fund has a mandate to invest at least 65% in Indian equities and rest in foreign securities, it will be considered at par with Indian equity funds and treated accordingly for tax purposes, i.e. no capital gains tax if the investment is held for more than 12 months.
Funds that invest 65% or more in foreign stocks are not eligible for tax-exemption on long-term gains. Hence some fund houses launch schemes that invest only up to 35% in foreign securities.

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