Capital Gains and its Taxability For NRIs in India

India is a country that has witnessed a steady inflow of investments from foreign investors since it has started its liberalization program in the early 1990s. This is what gives rise to an important question about the taxability of such investment in the hands of non-resident investors. This is especially when assets are transferred to another non-resident and the consideration is also received from outside the country. In this article we will be discussing Taxability of the capital gains for the NRI (Non Residents) in India.

The applicability of the Indian tax laws is completely based on the residential status of a person rather than on their citizenship. In the case of an individual assesee, residential status is adjudged based on their physical presence in the country (India). A resident of the country is taxed on his global income whereas a non-resident is taxed only on income accrued in the country.

Transfer of capital assets

The transfer of a capital asset situated in India initiates major taxation in India. However, taxation is also subject to the relief available under the provisions of the DTAA (Double Taxation Avoidance Agreements) between India and the country of residence of the NRI.

Tax incidence under the head “Capital Gains” joins on the type of asset and holding period. “Capital asset” basically means the property of any kind that has been held by a particular taxpayer. It also includes shares or securities in any Indian company. Although, personal effects, stock-in-trade, consumable stores, or raw materials held for the sole purpose of business or profession are excluded from the scope. Sale, exchange, waver of a capital asset, or extinguishment of rights, indicate ‘transfer’ chargeable to tax in a financial year.

Categorization of Capital Gains

Long-term capital assets are assets that are being held for over 36 months preceding the date of transfer. Immovable property or unlisted shares of an Indian company come under the category of long-term capital assets if they are held for more than 24 months or else the same is treated as short-term assets. Listed equity shares or units of equity-oriented funds come under long-term capital assets only if held for more than 12 months.

To calculate capital gains that apply to the transfer of a capital asset, one has to deduct the cost of acquisition, cost of improvement, and the expenses (incurred fully and exclusively in connection with the transfer) from the sale prospective. The resultant capital gains can be either short-term or long-term and that depends on the period of holding. Cost of acquisition is indexed in the case of long-term capital gains (LTCG) to account for inflation that has been there over the years.

Now for calculation of capital gains on the sale of shares or debentures of an Indian company, non-residents are allowed to convert the cost of acquisition, expenditure which have been occurred in the connection with the transfer and the sale consideration into the same foreign currency as was spent to purchase the same. What remains i.e. the resultant capital gains are then reconverted into Indian currency. This method is being suggested to counterbalance the effect of foreign exchange fluctuations. However, the benefit of indexation is not granted to non-residents in this case.

General tax rates

• LTCG (long-term capital gains) are taxed at 20% (plus applicable surcharge and cess).
• However, gains on transfer of listed shares or units of equity-oriented mutual funds are taxed at 10% (without the indexation or adjustment of forex fluctuation), if such gains take over Rs 1 lakh in a financial year and Securities Transaction Tax (STT) has been paid. Short-term capital gains (STCG) apply on the sale of listed equity or units which generally include equity-oriented mutual funds, and on which STT has been paid, are taxed at 15%.
• STCG on the transfer of other assets is also taxable at applicable tax rates for individuals and the rate of 40% in the case of non-resident companies.

Transfer of capital gains to and by a non-resident may require certain legal compliance. The resident transferees are required to deduct and deposit tax at source to the government and the non-resident transferors have to file a return of income disclosing all the particulars of transfer and the resultant capital gains. Non-compliance with these statutory obligations may have to face penal consequences. Hope this article about the taxability of capital gains for NRI (Non Residents) in India is helpful.

Suggested Read: How to file Income Tax Return for NRI in few simple steps?