Foreign Dividend Income - Investment made under LRS - Income Tax

Hi,

If one makes investment in Foreign Shares under LRS and earns Dividend, the dividend is taxable in India (DTAA can be availed).

Is there any timelimit within which the realised dividend should be brought back to India?
Can the dividend be reinvested in Foreign share without bringing back to India?

I found following FAQ in RBI which says it has to be brought back if uninvested within 180 days. Is it correct understanding or does it have different context.

Q 4. Under LRS are resident individuals required to repatriate the income earned on investments abroad, over and above the principal amount?

Ans. The investor who has remitted funds under LRS can retain and reinvest the income earned from his investments made under the Scheme. However, the received/realised/unspent/unused foreign exchange, unless reinvested, shall be repatriated and surrendered to an authorised person within a period of 180 days from the date of such receipt/ realisation/ purchase/ acquisition or date of return to India, as the case may be.

Further, any additional repatriation requirement with respect to investments made under Overseas Investments Rules and Regulations 2022 shall also be adhered to.

Thanks

Sri

Your understanding is correct but needs clarification for proper context. Let’s break this down:

1. Taxability of Dividend Earned on Foreign Shares

Dividend income from foreign shares is taxable in India under the Income Tax Act, 1961, as part of your total income, under the head "Income from Other Sources."
Double Taxation Avoidance Agreements (DTAA) benefits can be availed to claim a tax credit for taxes paid in the foreign country where the dividend is earned.

2. Bringing Dividend Back to India

The FAQ from the RBI clarifies the rules under the Liberalized Remittance Scheme (LRS) and Overseas Investment Rules:

Repatriation Rule under LRS:
- The income (e.g., dividend) earned abroad must be repatriated to India within 180 days if it is not reinvested abroad.
- This means:
  - If the dividend is realized but left unutilized (i.e., not reinvested in any foreign asset), it should be brought back to India.
  - If reinvested (e.g., in foreign shares or other permissible assets), there is no need to bring it back.
Rationale for the Rule:
- The rule ensures that unutilized foreign earnings are not kept idle abroad and are brought back to the domestic economy.

3. Can the Dividend Be Reinvested Abroad Without Bringing It Back?

Yes, the dividend can be reinvested in foreign shares or other permissible investments under the LRS without the need to bring it back to India, provided:

The reinvestment happens within the 180-day period.
The reinvestment is compliant with Overseas Investment Rules and Regulations, 2022.

4. Additional Considerations

Tracking and Documentation:
- Maintain proper records of:
  - Dividend receipt dates.
  - Reinvestment details, if any.
  - Compliance with LRS limits (currently $250,000 per financial year).
- This ensures smooth audit trails and compliance with both RBI and tax regulations.
Unused/Unrealized Funds:
- If the dividend remains unutilized beyond 180 days and is not repatriated, it may be considered a violation of FEMA rules.

Conclusion

Dividends earned from foreign shares under LRS must be brought back to India within 180 days unless reinvested abroad.
Dividends can be reinvested in foreign assets without repatriating them to India.
The context of the FAQ aligns with your understanding, and adhering to these guidelines ensures compliance with FEMA and LRS regulations.