In addition, you should focus on the tax-adjusted return too. Tax rates on gains made on the sale of equity shares listed abroad, for instance, are different from capital gains made on Indian equities. This apart, dividend and rental income are taxable as well.

Resident (resident and ordinarily resident) Indians have to pay taxes on income earned anywhere and report it in their income tax return forms.

Read on to understand the tax implications of investing in various asset classes overseas. To keep things simple, we have taken three broad asset classes only; equity (direct and through mutual funds), real estate investment trusts (REIT), and physical property.

Equity sharesIncome from dividends and capital gains earned on equity shares and mutual funds is taxable in India. If you have been invested in equity shares directly for more than 24 months, any gain made on the sale will be treated as long-term capital gains (LTCG) and attract tax at the rate of 20 percent plus cess and surcharge, if applicable.

“On the other hand, where the assets are held for less than 24 months the gains would be regarded as short-term gains and as a result are taxable at the slab rates applicable to the individual,” says Sudhakar Sethuraman, Partner, Deloitte India.

For mutual funds, the threshold for LTCG is three years. In other words, fund of funds that invest in foreign equities or international mutual funds, are treated like debt funds in India, as far as their taxation is concerned. Like in the case of LTCG netted in India, expenses incurred on the sale of such assets are allowed as deduction from your total income. You can also claim an indexation benefit that will shrink your taxable LTCG, reducing the tax payable.

The exchange rate will also come into play while computing tax on foreign income. “Income earned in foreign currency is converted into Indian rupees at TT buying rate on the specified date,” says Kuldip Kumar, Partner, Vialto Partners India.

Dividend income earned on equity shares and mutual funds will also be taxed at a slab rate.

Mutual funds and debt instruments

Resident Indians investing in fixed income instruments abroad can earn income in the form of interest and capital gains.

The tax structure is similar to that of domestic debt funds. Also, if you have invested in international funds offered by Indian fund houses, the tax treatment will be similar to that of Indian debt funds.

This includes mutual fund schemes that invest directly in overseas stocks and fund of funds that invest your money in units of mutual funds abroad. That is, if held for three years or more, the capital gains are subject to LTCG tax of 20 percent, with indexation. If the holding period is shorter, the gains are added to taxable income and taxed as per the marginal rate applicable.

This is because only those mutual fund schemes that invest more than 65 percent of their money in listed Indian stocks are eligible for equity-like tax treatment. Since most international mutual funds do not meet this criterion, they are treated as ‘non-equity’ schemes.

Immovable property

Property has been a favourite overseas investment avenue for many wealthy Indians. Barring the COVID-affected 2020-21, Indians’ remitting abroad to buy properties has seen a growth – from $84.53 million in 2018-19 to $112.9 million in 2021-22. The United Kingdom, US, Australia and Dubai are amongst the most popular investment destinations for well-heeled Indians looking to invest in properties.

Holding periods to determine long- and short-term nature of your investments are similar to those of equities. LTCG (property sold after two years) will be taxed at 20 percent after indexation, plus applicable cess and surcharge, while short-term capital gains will be added to your slab rate and attract the marginal rate of taxation.

If you earn rental income through your properties, you are liable to pay tax in India. Again, it will be simply added to your taxable income and taxed as per slab rates applicable to you.

However, those with property investments overseas are deprived of certain benefits that someone who owns a house in India is entitled to. “You get a 30 percent rebate on rental income if the rent is received in India. But if you get rent from abroad the same isn’t available,” points out Sudhir Kaushik, Co-founder and CEO, Taxspanner.com.

Similar is the case with tax benefits of up to Rs 1.5 lakh under section 80C on principal repaid and up to Rs 2 lakh under section 24 on interest paid. “These are available for both the co-borrowers if a couple takes a joint loan. But these deductions are restricted to home loans taken from Indian banks for a property within India. No taxation deduction is available for a house bought overseas,” he adds.

If you sell your residential property in India and use the proceeds to buy another house within a year, the capital gains are exempt from tax. However, this tax break will not be available if you choose to remit that amount abroad to fund a property purchase. “The capital gains deduction would be available only if one purchases one or two house properties within India,” says Kaushik.

Real estate investments trusts (REIT)

Taxation of investments in foreign REITs is a slightly more complicated affair. For one, this avenue comes with multiple income streams – rent, dividend, capital gains and dividend. Some REITs yield rental income, while some don’t, depending on the investment destination.

The rate of taxation is, among other things, linked to the underlying assets in a REIT’s portfolio. Some REITs invest in foreign shares, and gains made on the sale of these units will attract a long-term capital gains tax of 20 percent.

Short-term capital gains will be subject to your marginal rate of tax.

Reporting income in tax return forms is a must

If you have invested overseas, it will have to be disclosed in your annual income tax returns. You will have to enter the details in Schedule FA in ITR-2 or ITR-4 (Sugam). “These foreign assets are required to be reported basis the calendar year of the country in which such assets are possessed and a taxpayer is required to provide details of the country name, nature of ownership, details of the asset, income generated from such asset, etc,” says Sudhakar of Deloitte.

In addition, if your income during the financial year is over Rs 50 lakh, which is likely to be the case for affluent investors, you will also have to share the details in the forms’ Assets and Liabilities Schedule.

To avoid double taxation if you have already paid taxes abroad, the income tax laws provide relief. “Where credit of any taxes paid overseas is to be availed, one should not forget to fill the prescribed form 67 giving details of the treaty relief claimed if any,” says Kumar.

Failing to disclose accurate foreign income can land you in trouble. “India has signed an information sharing treaty with several countries and financial information of investments/income is being shared by those countries with India. This is under the scanner of Indian tax authorities and taxpayers should ensure meticulous reporting of their overseas income and accurate disclosures of foreign assets to avoid any penal action,” he adds.

If you miss reporting overseas income and assets to make inaccurate disclosures, you could invite penal action under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. “An inaccurate disclosure can lead to a penalty of Rs 10 lakh. Therefore, one, while making investments overseas has not only to comply with the norms but also need to ensure proper disclosure in one’s tax return,” says Kumar.