Planning to move to the UAE? Know the tax implications for your investments in India

Know the tax benefits of NRI status, double taxation avoidance treaties.

Wealthy Indians are increasingly looking at relocating to developed countries via Golden Visa programmes to gain access to quality infrastructure, improved lifestyles and friendlier tax structures.

Several countries, including the US and the United Arab Emirates (UAE), which are the most popular destinations, offer second residency via investments. The latter ranks amongst the top 10 Golden Visa programmes globally, as per data from Henley and Partners, an investment migration consultancy. In the case of the UAE, it is strictly a 5-10 year residency permit and does not lead to citizenship.

There is also a double tax avoidance agreement (DTAA) in place which offers clarity on income arising out of, or accrued in, India for NRIs. It is common for such individuals to continue to invest in India across asset classes including equities, real estate and debt, despite relocating overseas.

Also read: Why UAE’s golden visa is the top choice for global millionaires

Here are the tax rules such NRI investors should be aware of:

Determining the tax residency status

“For Indian citizens who have relocated to the UAE, the absence of personal income tax in the UAE does not eliminate their tax obligations on income sourced from India. While the India–UAE tax treaty provides relief in certain cases, several categories of income—particularly capital gains from certain assets—remain taxable in India,” says Rupali Ashar, Partner, Legacy Growth.

The key is to understand the tax rules that govern residency status in India. “You don't become a UAE tax resident by simply having a UAE Golden Visa. If you stay in India for over 182 days in a year or 365 days in four previous years and 60 days in a year, you will be considered a resident Indian for tax purposes. However, for Indian citizens going abroad for employment purposes, the threshold period of stay in India as per the second condition remains 182 days and not 60 days,” says Mayank Mohanka, Founder-Director, TaxAaram.com. A Golden Visa, however, can help bolster your case. Mohanka points to a recent Chennai ITAT decision where the higher threshold of 182 days was not allowed to the taxpayer as he was travelling to UAE on a tourist visa. “So, the UAE Golden Visa can justify your intent of living in the UAE for employment purposes,”  he adds.

However, you need to bear in mind certain additional nuances of tax residency rules while estimating your income accrued in, or arising out of, India. "Indian citizens or Persons of Indian Origin (PIO) whose Indian-sourced income exceeds Rs 15 lakh will qualify as non-residents only if their stay in India is less than 120 days in a financial year. Also, Indian citizens who are not liable to tax in any other country and who have Indian-sourced income of more than Rs 15 lakh, shall be deemed residents even if they don’t stay in India," says Ashar.

As an NRI, you have to offer the income earned in India to tax. “What you earn abroad is not subject to tax. Then, there is DTAA, which allows certain concession/benefits to the residents of UAE. For example, dividend income is taxed at 10 percent. However, rental income is taxed at slab rates,” says Ved Jain, Founder, Ved Jain & Associates and former president of The Institute of Chartered Accountants of India (ICAI).

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Taxation of capital gains

Gains of over Rs 1.25 lakh made on sale of listed equity shares where the holding period is 12 or more months will be treated as long-term capital gains (LTCG) and taxed at 12.5 percent. If the holding period is shorter than 12 months, then these will qualify as short-term gains and attract tax rate of 20 percent. "Any capital gain arising from sale of equity shares and immovable property situated in India by NRI will be taxable in India as per its domestic tax law. No additional relief is available under the provisions of the DTAA," says Poorva Prakash, Partner, Deloitte India.

On the other hand, mutual fund units are not treated as shares of an Indian company. “Mutual fund units are different from shares, so the treaty amendment in April 2017, making the gains on sale of shares of Indian companies in taxable India, is not applicable in case of gains on sale of mutual fund units in India,” says Mohanka.

Mutual fund units are not specifically covered under the other paragraphs of the ‘Capital Gains’ article under the UAE–India DTAA. "Therefore, capital gains arising from sale of mutual funds are taxable in the country of residence of the taxpayer as per the residual clause (Article 13(5)) of the DTAA. Accordingly, an NRI qualifying as a tax resident in UAE may avail exemption in India on capital gain arising from mutual fund units under the provisions of India – UAE DTAA," says Poorva Prakash. The taxpayer must obtain a valid UAE Tax Residency Certificate (TRC) for the relevant period and also furnish Form 10F on the income tax portal for claiming benefits under DTAA in India.

Dividend income is taxable at the rate of 10 percent. “To claim DTAA benefits, they must provide a Tax Residency Certificate (TRC) from the UAE and also file returns in India under section 115A. Non-compliance could trigger tax liability at a higher domestic rate of 20 percent,” says Mohanka.

Weigh the tax benefits carefully 

On real estate, Indian tax laws do not offer any leeway. As long as the property being sold is located in India, the capital gains are taxable, tax residency or DTAA notwithstanding. “For long-term gains (property held over 24 months), a capital gain tax rate of 12.5 percent applies. For short-term gains (property held 24 months or less), tax is charged at the individual’s applicable slab rate,” says Ashar.

Finally, you must bear in mind that the UAE issues TRCs based on calendar year (January 1 to December 31). "Since the tax year in India runs from April 1 to March 31, one may need to obtain TRC for more than one year to cover the Indian tax period. Therefore, individuals should evaluate the cost of obtaining multiple TRCs against the potential tax benefit under the DTAA," says Prakash.