Navigating NRI Capital Gains and Taxation: A Comprehensive Guide for Post-2018 Rules — Part — 3

NRI- Capital Gains & Taxability (LTCG & STCG)

This writeup/compilation is restricted to capital gains and its taxation in the hands of non-residents arising on or after 01.04.2018 out of:

• Sale of listed equity shares
• Sale of unlisted equity shares
• Sale of equity shares acquired through ESOP scheme.
• Sale of units of listed mutual funds — Equity oriented
• Sale of units of mutual funds — Debt oriented
• Sale of immovable properties

Points to be considered

-When a capital asset is sold, it may result in capital gains/loss.

-The period of holding of the asset determines whether the gain/loss is Long Term or Short Term.

-The tax rates of capital gains depends on whether the capital gain is a long-term gain or short-term gain.

-The methodology of calculation of capital gains differs for different assets.

-If the assets are acquired through foreign exchange, there are different provisions to calculate the capital gains.

-The tax rates are different for Long Term Gains or Short-Term Gains. Further, the rates also depend upon the type of asset sold. (i.e., whether equity shares or immovable property)

Sale of listed equity shares

Effective from 01.04.2018, the newly introduced Section 112A for taxation of long-term capital gains is applicable on sale of listed equity shares through the stock exchange.

Section 112A is applicable when STT (Securities Transaction Tax) is paid at the time of purchase and sale of shares. Even in cases where shares are acquired through inheritance, gift, ESOP, etc., the provisions of section 112A may be applicable . In other words, the Section 112A can be applied only if the conditions of the Section 112A is satisfied.

If the listed equity shares are sold after holding them for more than 12 months, the resulting loss or profit will qualify as “long term”. In other words, if such shares are sold within 12 months the loss or profit will be termed as “short-term”.

In the case of listed equity shares acquired by way inheritance or gift, the period of holding will commence from the date of acquisition by the deceased/donor.

Effective from 01.04.2018, the “cost of acquisition” of listed shares will be the higher of:

a) The actual cost of such investments;

b) The lower of:

1) Highest price quoted on the recognized stock exchange on 31 January 2018;

2) Sale price.

In the case of listed equity shares acquired by way inheritance or gift, the actual cost will be the cost in the hands of the deceased/donor. In this case also the clause (3) mentioned above, will apply.

The capital gain/loss will be the difference between the “cost of acquisition” and sale price.

The aggregate of long-term capital gains exceeding Rs.1,00,000/- during the financial year after setting off the long-term capital loss will be taxed @ 10%.

The long-term capital loss, if any after setting of long-term gains, will be carried forward for 8 subsequent years.

If the sale results in “short Term capital gain”, the same shall be taxed @ 15% as per provisions of section 111A .

Indexation benefit is not available under Section 112A.

Surcharge (if applicable) and Education Cess @ 4% shall be levied on the basic tax rate mentioned above.

The tax liability on long term capital gains can be reduced by investing in residential property subject to conditions mentioned in Section 54F.

The above stated methodology/facts are applicable for shares:

a) Purchased and sold through stock exchange;

b) Inherited and subsequently sold through stock exchange; and

c) Acquired through gift and subsequently sold through stock exchange.

Sale of unlisted equity shares

If the unlisted equity shares are sold after holding them for more than 24 months, the resulting loss or profit will qualify as “long term”. In other words, if such shares are sold within 24 months the loss or profit will be termed as “short-term”.

Indexation is a process by which the cost of acquisition is adjusted against inflationary rise in the value of asset. For this purpose, Central Government has notified cost inflation index. The benefit of indexation is available only to long-term capital assets.

Indexed cost of acquisition is computed with the help of following formula :

Cost of Acquisition * Index of the year of sale/ Index of the year of purchase

The capital gain/loss will be the difference between “sale consideration” and “Indexed Cost of acquisition”.

On long term capital gain, the applicable tax rate is 20%. The short-term capital gain will be taxed along with other income at the applicable slab rate. The maximum rate being 30% at present.

The tax liability on long term capital gains can be reduced by investing in residential property subject to conditions mentioned in Section 54F.

Sale of equity shares acquired through ESOP scheme

The Income Tax Act, 1961 has laid down the following two stages of taxation for employees in respect of shares allotted to them under an ESOP:

a) Upon allotment of shares after the employee exercises his option on the completion of the vesting period; and

b) When the shares allotted to the employee are sold by him on the stock exchange.

In the first stage, the difference between the Fair Market Value (“FMV”) of the shares on the date of exercise and the exercise / subscription price paid by the employee, if any, is taxable as perquisite under the head ‘Income from salary’ on the date of allotment of shares.

When he sells the shares, the employee will be taxed for capital gains. The capital gains is computed as the difference between the sale proceeds and FMV of the shares that were already considered by the employer while computing the perquisite value.

The period of holding, the mode of computation, etc remains the same as mentioned under “Sale of listed equity shares”. The only difference being the ‘Cost of acquisition’ will be the ‘FMV’ of the shares on the date of exercise of ESOP.

Sale of units of listed mutual funds — Equity oriented

Equity oriented fund and balanced fund are treated at par for the purpose of tax.

If 65% or more of the corpus of a mutual fund scheme is invested in equities, it is treated as equity scheme for the purpose of taxation.

ELSS scheme is also treated as ‘equity fund’. However, ELSS scheme has a 3-year lock in period.

Arbitrage mutual funds, which invest in arbitrage opportunities in cash and derivative segments of the equity markets, are treated as equity funds for the purpose of taxation.

The holding period to qualify for long term/short term, the mode of computation and tax liability is the same as applicable to sale of listed equity shares.

Sale of units of listed mutual funds — Debt oriented

Funds which do not qualify as equity fund are termed as ‘debt fund’.

Debt funds are referred to by many names such as:

1) Dynamic Bond Funds,

2) Income Funds

3) Short-Term and Ultra Short-Term Debt Funds

4) Liquid Funds

5) Gilt Funds

6) Fixed Maturity Plans (FMPs)

International funds (which invest in stocks abroad) and fund of funds (a mutual fund scheme that invest in different mutual funds) are considered as debt funds.

If the units of debt-oriented funds are sold after holding them for more than 36 months, the resulting loss or profit will qualify as “long term”. In other words, if such units are sold within 36 months the loss or profit will be termed as “short-term”.

All the conditions and computation mentioned under “sale of unlisted equity shares” will apply in this case. The tax rate also being the same @ 20% after indexation for long term gains.

Special provisions for computation of capital gains for shares & debentures of Indian company acquired through foreign exchange.

Capital gain shall be determined as under:

First proviso to section 48: Capital Gains in case of Non-Resident

-NR Assessee ( Including Foreign company);

-Asset being Shares & Debentures of Indian Company;

-Such asset acquired in foreign currency by way of purchase or reinvestment;

-Then capital gain shall be calculated in foreign currency & after that it shall be reconverted into Indian currency.

Rule 115A: Method of conversion

Notes

Assessee should be NR in the year of sale

Index benefit not available where first proviso applies

Example: Mr. Arjun, a NRI, remits US $ 40,000 to India on 16.09.2006. The amount is partly utilized on 3.10.2006 for purchasing 10,000 equity shares in A Ltd, an Indian Company, at the rate of ` 12 per share. These shares are sold for ` 48 per share on 30.03.2024. Fair market value of these shares on 31.01.2018 was ` 35 per share.

The telegraphic transfer buying and selling rate of US dollars adopted by the State Bank of India is as follows:-

Date Buying Rate (1 US$) Selling Rate (1 US $)

Compute the capital gain chargeable to tax for the A.Y. 2024–25 on the assumption that

(a) These shares have not been sold through a recognized stock exchange

(b) These shares have been purchased and sold through a recognized stock exchange.

PART 3B

Sale of immovable properties:

It is presumed that the property sold is a ‘residential property’ and further, the sale is from a non-resident (seller) to a resident (purchaser).

If a ‘residential property’ held by the NRI for more than 24 months is sold, the resulting gain will be long term in nature. In other words, property sold within 24 months will qualify as ‘short term’.

Tax benefits are available only for ‘long term gains’. Therefore, it makes sense to hold a property for more than 24 months before selling the same.

Irrespective of the tax liability of the NRI, the resident purchaser is under an obligation to deduct tax at source out of the total consideration payable to the NRI seller.

It is very important for the NRI seller to understand the obligation of the purchaser. This will avoid misunderstanding between the parties involved at a later stage. The obligation of the purchaser is as under:

1) The purchaser must have a TAN (Tax Deduction Account Number) and the seller must have a PAN (Permanent Account Number). If the same is not available, necessary application for allotment of the same must be done.

2) Whether the seller is going to make a profit or loss on sale of property, the purchaser must deduct tax at source (TDS) under Section 195 of the Income Tax Act, 1961.

3) The TDS is applied on the total sale price and not on the capital gain. The TDS rate is 20% (on long term capital gains) and 30% (on short term capital gains) plus surcharge as applicable plus Cess.

4) The purchaser must pay the tax deducted to the Income Tax dept and thereafter file quarterly TDS return with the tax dept.

5) The purchaser will issue TDS certificate (Form 16A) to the seller. The issuance of such certificate is possible only if the seller has a PAN.

6) The seller has an option to approach his tax officer and make an application for lower tax or not tax deduction certificate. This process may take almost a month. Once a lower or no tax deduction certificate is issued, the purchaser is duty bound to deduct tax at the rate mentioned in the certificate.

For arriving at the capital gain, the following parameters must be calculated:

a) Period of holding: and

b) Cost of acquisition.

Period of holding: The controversy here is whether, the period of holding should start from the date of agreement or from the date of possession. The most conservative approach, to avoid litigation, is to consider the holding period starting from the date of possession. There are various scenarios and the logic for of calculating the holding period may differ on a case-to-case basis. There are practical situation wherein the non-resident assumed the gains as “long-term” and the tax officer held it as “short-term”. Such situation has a huge tax impact. In the case of property acquired through inheritance or gift, the period of holding by the previous owner is also to be added to determine whether held for more than 24 months or not.

Cost of acquisition: This is the purchase price paid to acquire the property. All incidental expenses directly attributable to the purchase transactions should be added to arrive at the cost of acquisition. E.g. Stamp duty and registration fees paid, brokerage paid, etc can be added to the cost of acquisition. In the case of property acquired through inheritance or gift, the cost to the previous owner is to be taken as the cost of acquisition.

Cost of acquisition for property acquired prior to 01.04.2001: In such situation, the seller has an option to substitute the value of the property as on 01.04.2001 as the “cost”. He will have to obtain a valuation certificate from a registered valuer. In the case of ancestral property or very old property, it makes sense to obtain a valuation as on 01.04.2001 resulting in substantial reduction in taxable capital gains.

Improvements to the property can also be added to the cost of acquisition. However, what is improvement and whether all types of improvements can be added to the cost is highly controversial. Generally, expenses on improvements to the property incurred immediately after acquiring the property to make it habitable to the standard of living of the purchaser can be considered as allowable improvements to the property and accordingly such expenses can be added to the cost of the property.

Indexed cost of acquisition: Once the cost of acquisition is calculated, the same is to be adjusted for inflationary impact. The indexation formula mentioned under “sale of unlisted equity shares” is used to arrive at the indexed cost of acquisition. Indexation benefit available only for property held for more than 24 months. In the case of property acquired prior to 01.04.2001, the value arrived as on 01.04.2001 will be considered as the cost and accordingly indexed.

The Capital gain is calculated as the difference between “sale price” and “Indexed cost of acquisition” in the case of property held for more than 24 months. For property held for less than 24 months and sold, the capital gain is calculated as the difference between “sale price” and “cost of acquisition”.

The basic tax rate for capital gain is 20%. This is to be applied on the long-term capital gain In the case of short-term capital gain, the same will be taxed as per tax slabs applicable to the seller, the maximum being 30%.

In the case of long-term capital gain, the seller, has the option of avoiding the taxes completely or partially by investing “the capital gains” as under:

a) Purchase another ‘residential’ property within 2 years from the date of sale of old property, or construct another ‘residential’ property within 3 years.

b) Purchase another ‘residential’ property before the date of sale of old property such that the time gap between the two transactions should not exceed 12 months.

c) Purchase certain specified bonds (REC bonds or NHAI bonds) within 6 months from the date of sale of old property.

d) A combination of (i) & (iii) or (ii) & (iii).

On sale of property, there is an obligation to file Income Tax Return by 31st July. Assuming that the sale transaction took place on 21st November 2022, (FY 2022–23), the due date for filing the tax return for FY 2022–23 will be 31st July 2023. The amount of capital gains amount not utilized by 31st July 2023, will have to be parked in a separate bank account under the capital gain account scheme. This must be done before filing the tax return and before 31st July 2023. By parking funds in the capital gain account scheme, the tax department presumes that the same is utilized for acquiring the new property and accordingly the capital gain exemption is given while computing your tax return.

Once a capital gains account is opened, the banker will ensure that the funds are used for making payments towards the new property. There are practical situation wherein the seller opens the capital gains account and thereafter decides not to buy a property for various reasons. In such a situation, the seller will have to get the approval of his tax officer to close the account. The tax officer may ask him to pay the tax accordingly.

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Continue Read:

NRI Taxation Simplified:Understanding Residential Status and Taxes-Part 1

Understanding NRI Accounts and Taxation: Types and Implications — Part 2

Disclaimer:

This Article/Blog has been contributed by Butchibabu Gorantla, B.Com, FCA, FCS, Chartered Accountant. This article/blog is posted with due authorization from the author for the academic purposes. The views and opinions expressed herein are those of the author and don’t constitute a legal advice to any user.