Taxability of Capital Gains in India for Non-Residents

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Taxability of Capital Gains in India for Non-Residents

Under the Income Tax Act, 1961 (Act), taxability emerges as the “transfer” of a “capital asset” situated in India regardless of the spot of receipt of consideration. In any case, non-residents can assess if there is any relief available, both in terms of scope and rate of tax, under the tax treaty between India and their home country.

Capital Assets and Transfer

Under the Act, “Capital Asset” has been characterized broadly to incorporate property/asset of any sort held by a taxpayer and incorporates shares or securities of an Indian organization. Be that as it may, it does exclude stock in trade, consumable stores or raw materials held for the purpose of business or profession and personal effects of the transferor.

Certain other determined assets have additionally been kept outside this definition. Similarly “transfer” has been characterized thoroughly and inter-alia incorporates sale, exchange, relinquishment, and extinguishment of rights. Capital Gain Income according to taxability is available in the financial year (1 April to 31 March of the next year) in which transfer of the capital asset takes place.

The Act contains indirect transfer provisions too. Accordingly, shares of an overseas organization that infers its worth considerably, straightforwardly or in a roundabout way from the assets located in India, are deemed to be the assets situated in India. Immediate or Indirect transfer of such share triggers tax liability in India.

Classification of Capital Assets

Short-term capital asset implies any capital asset held by a taxpayer for more than three years quickly preceding the date of its transfer. However, in the case of unlisted shares of an Indian organization or an undaunted property, being land or building or both, the holding time frame prescribed is two years. This period is additionally decreased to a year in the event of India-listed organizations and units of equity-oriented funds. Long haul capital asset implies any capital asset other than a short-term capital asset.

This classification between the short term and long term capital asset is significant as it has an orientation on the computation mechanism to be followed and the rate of tax. Capital Gain on transfer of short-term capital assets or long-term capital assets is alluded to as Short-term Capital Gain(STCG) or Long-Term Capital Gain (LTCG) respectively.

Important Exemptions

Considerably, there are no capital gains implications in such cases. Some key exemptions are:

  • Transfer of capital asset under gift, under a will or to an irrecoverable trust;
  • Transfer of capital asset by a company to its Indian subsidiary, provided specified conditions are met;
  • Transfer of shares of an Indian company pursuant to tax-neutral amalgamation/ demerger of foreign companies, provided specified conditions are met; and
  • Transfer of bonds or Global Depository Receipts, the rupee-denominated bond of an Indian company, derivative made by a non-resident in recognized stock exchange located in any International Financial Services Center, if specified conditions are met.

Computation Mechanism

Typically, to compute capital gain, the full estimation of the consideration received or accruing, is reduced by:

  • Cost of acquisition of the asset
  • Cost of any improvement
  • Expenditure incurred wholly and exclusively in connection with such transfer.

In the case of a non-resident, capital gains emerging from the transfer of shares or debentures of an Indian organization are processed by converting the cost of acquisition, expenditure incurred in connection with the transfer, and the sale consideration into the same foreign currency as was initially utilized to purchase them.  Post that, the capital gains so registered is reconverted into Indian money. The purpose behind this computation mechanism is to dilute the effect of any foreign exchange fluctuations.

Applicable rates

STCG in case of an equity share in an Indian organization or a unit of an equity-oriented store and subject to securities transaction tax is chargeable at the rate of 15%.STCG on the transfer of any other capital asset is taxable according to the prescribed slab rates for people and 40% in the case of non-resident Indian Companies.

LTCG emerging from the transfer of unlisted securities or portions of a firmly held organization is chargeable to tax in India at 10%, without giving indexation advantages and alteration because of forex fluctuations. LTCG on the transfer of long term capital resource being shares of a listed organization or a unit of an equity-oriented fund if such gains surpass $0.1 million in a financial year is taxable at 10%. If there is any occurrence of some other long term capital assets, LTCG is chargeable at 20%.

There are tax controversies around provisions dealing with the off-market sale of shares. Further, there are certain provisions dealing with capital gains in the case of specified investors and/ or specified assets as well.

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