How is an NRI taxed on income from investments in India?

Dilip Lakhani, Senior Chartered Accountant, answers queries from our readers on income tax and other levies.

One of my relatives living in the Gulf has invested in India in various plans like bank deposits, mutual funds, and stocks. As far as I know, income earned from these sources are not taxable in India. Please throw some light on the taxation rules on the income earned on investment giving reference to the Income Tax Act. - REHANA KHANAM

The status of your relative under the provisions of the Income Tax Act, 1961, will be non-resident as he is residing in the Gulf. He earns income on his investment in bank deposits, mutual funds and shares. He is earning this income in India. As per provisions of Section 5 of the Act, income received in India is chargeable to tax. Depending upon the nature and the quantum of the income, he will be liable to pay tax in India. He can claim deductions exemptions from various sources of income depending upon the nature of the income. For e.g.dividend earned on investments in equity shares will be exempt. The interest earned on bank deposit is chargeable to tax. If he has invested the funds from Gulf in foreign exchange then he will be entitled to some more benefits. I suggest that he should consult a tax expert and based on nature and the quantum of the income decide its tax liability in India.

I had taken Rs 5 lakh from my brother-in -law four years ago to repay my home loan. He had put the amount in my bank loan account.He is an NRI. How can I repay him now so that he does not have to pay a tax on the amount received? He has an NRO account; should I deposit the money there or should I gift the amount to my sister? His only source of income in India is some mutual fund dividends which adds up to little less than Rs 2.5 lakh.He does not file tax returns in India.- SAMINA SITABKHAN

The status of your brother-in-law is non-resident and he has given a loan of Rs 5 lakh to you.You intend to repay the said loan. The receipt of the amount, being repayment of loan by your brother-in-law, is not chargeable to tax in India as this transaction is on capital account. You can return the loan by issuing the cheque in his name which he can deposit in his NRO account. As far as income tax provisions are concerned, this transaction will not be subjected to any tax.However, you should comply with the provisions of the Foreign Exchange Management Act under which there are certain restrictions on loan transactions between a non-resident and the resident.

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