For Indian residents looking to invest abroad, the current overseas investment framework offers two main pathways: the Liberalized Remittance Scheme (LRS) and the Overseas Direct Investment (ODI) regime. Under the LRS, individuals can invest up to USD 250,000 per year in both listed and unlisted foreign companies. The ODI regime, on the other hand, allows Indian companies to make equity investments, loans, or guarantees to overseas entities, tailored to the business needs of the foreign investee.
A significant caveat in the LRS is the tax collected at source (TCS) of 20% on amounts exceeding INR 7 lakhs remitted in a financial year. This TCS, collected by banks, increases the upfront cost of investment and ties up funds in low-yield tax refunds. This tax change, effective since April 1, 2023, has diminished the appeal of the LRS by complicating cash flows for investors, who might also need funds for other permissible remittances like education or healthcare support for family members abroad.
Contrastingly, investments under the ODI regime do not attract TCS, offering a more tax-efficient channel for corporate entities to invest abroad without immediate tax burdens on their shareholders. This route is particularly advantageous for high-net-worth individuals looking to make long-term investments.
However, investors using the ODI route must carefully consider the ‘place of effective management’ (POEM) rules, which determine tax residency based on where the company is effectively managed. If a foreign entity is managed from India, it could be treated as a tax resident and subject to Indian taxes, complicating the fiscal landscape significantly.
The withdrawal of the preferential 15% tax rate on dividends from foreign entities (where the Indian company holds at least 26% equity) since April 1, 2023, also impacts the ODI route. Now, dividends are taxed according to the recipient’s applicable tax slab, although a deduction is available if the Indian company redistributes these dividends to its shareholders.
For those investing in an International Financial Services Centre (IFSC) in India, there are numerous tax incentives available, depending on the business activities of the IFSC unit. These investors can contribute to investment funds in IFSC as an Overseas Portfolio Investment (OPI), enjoying several fiscal benefits.
Furthermore, any overseas investment and the resultant income must be reported in the ‘Foreign Assets’ schedule of the Indian tax return. Failing to disclose or incorrectly reporting foreign assets and income could attract severe penalties under the Black Money Act, effective since April 1, 2016.
A recent ruling by the Mumbai Bench of the Income Tax Appellate Tribunal underscores the risks, as it upheld the levy of penalties for non-disclosure of foreign assets despite the taxpayer having accounted for the source and paid the necessary taxes.
Investors must also adhere to compliance obligations under the laws of the countries where investments are made, to avoid legal pitfalls and penalties.
In conclusion, while the LRS provides a straightforward investment route for individuals, the recent tax amendments and stringent conditions have made the ODI scheme a more favorable option for those capable of navigating complex legal frameworks across jurisdictions.
