Are Indian capital gains and dividends taxable for a non-resident working in Dubai, and how?

The dividend income and capital gains earned by non-residents from their investments in Indian shares and equity mutual funds are taxable in India. However, there are many misconceptions around this issue. Today's Q&A explains them in response to a reader's query whose son lives and works in Dubai but invests in Indian shares and equity mutual funds.

A non-resident is liable to pay tax in India only in respect of his Indian Income. Please note that all interest received by NRI are not tax-free in India. The interest earned by a non-resident on his NRE and FCNR account are only tax-free, but other interest like interest on NRO account are fully taxable in India.

Even the banks are required to deduct tax interest on NRO account without there being any basic threshold limit.

The dividend income as well as the capital gains earned by your son from shares listed in India and equity-oriented schemes of mutual funds are subject to tax in India. Like a resident taxpayer, a non-resident is also entitled to the basic exemption limit applicable depending on the age and the tax regime opted.

In case net income other than long-term capital gains of any nature and short-term capital gains on listed equity shares/equity mutual funds is less than the amount of basic exemption, a resident can set off such short fall in basic exemption against his all long term capital gains and short term capital gains on equity products.

The same facility to set off the shortfall in basic exemption is not available to a non-resident taxpayer and he has to pay full tax on all long-term capital gains as well as short-term capital gains on equity products.

So your son has to pay full tax on capital gains even if he does not have any other income or such other income is below the taxable limits. He has to pay a flat rate of 20% tax on his dividend income. He will also have to pay tax on all short-term capital gains earned on Indian equity at a flat rate of 20%. On long-term capital gains on such investment, he has to pay tax at flat rate of 12.50% beyond the initial ₹1.25 lakh, which comes tax-free as it is taxed at zero rate.

All the mutual fund houses are required to deduct tax at the time of redemption in case of non-resident investors.

Likewise, all companies paying dividends will deduct tax at source before paying dividends to non-residents at a flat rate of 20%.

I am sure your son has already intimated the bank where he has bank accounts about he being a non-resident and also completed his KYC as a non-resident for investments in shares and mutual funds to be fully legally compliant.

Key points for a non-resident from Dubai investing in India