Taxation of Capital Gains for Non-Residents
Introduction
Capital gains tax applies to income from the transfer of a capital asset. For non-residents, specific provisions govern aspects like period of holding, cost of acquisition, foreign currency fluctuations, and computation methods.
Taxability of Capital Gains
- Capital gains from an asset in India: Always taxable in India underSection 9(1)(i).
- Indirect Transfer: Gains from shares in a foreign entity that derive substantial value from Indian assets are also taxable in India.
- DTAA Applicability: The provisions of DTAA apply if they are more beneficial.
Computation of Capital Gains
Classification Based on Holding Period
o Short-Term Capital Asset: Holding period ≤ 24 months (exceptions for certain securities: 12 months).
o Long-Term Capital Asset: Holding period > 24 months/12 months.
o Certain securities (e.g., market-linked debentures, specified mutual funds, unlisted bonds/debentures) are always treated as short-term gains. [Section 50AA]
Capital Gains Calculation
o Sale Price – (Expenditure on Transfer + Cost of Acquisition + Cost of Improvement) = Capital Gains
o No Indexation for Capital Assets Sold After 23-07-2024.
Special Provisions for Non-Residents
o Securities held by Foreign Portfolio Investors (FPIs) are always capital assets.
o Certain Transfers Exempt from Tax (e.g., transfer of GDRs, Rupee Denominated Bonds, Government Securities between non-residents).
Tax Rates on Capital Gains
|
Type of Capital Gain |
Tax Rate |
|
Short-Term Capital Gains (STCG) |
Normal rates |
|
STCG on equity shares, mutual funds, or business trust units (STT paid) |
20% |
|
STCG on securities held by FPIs |
30% |
|
Long-Term Capital Gains (LTCG) |
|
|
LTCG on equity shares, mutual funds, or business trust units (STT paid) |
12.5% (on capital gain exceeding Rs. 1.25 lakh) |
|
LTCG from other capital assets |
12.5% |
- Foreign Currency Fluctuation Benefit: Allowed to non-residents on capital gains from shares/debentures of an Indian company except where shares/ debentures are unlisted or capital gain is taxable underSection 112A, Section 115AB, Section 115AC or Section 115AD.
Deductions and Exemptions
- Reinvestment Exemptions (Sections 54–54GB): Available to both residents and non-residents.
- Special NRI Deduction (Section 115F): LTCG from foreign exchange assets reinvested in shares or securities is tax-exempt.
- Deduction under Chapter VI-A: Not allowed except from short-term capital gain chargeable to tax at normal rates.
- Exemptions for Certain Investors and Funds:
o Income from transfer of units of the specified fund defined under Section 10(4D) [Section 10(23FF)]
o European Economic Community Investments [Section 10(23BBB)]
o Capital Gains of wholly owned subsidiary of ADIA or Sovereign wealth fund or pension fund from investment in Indian infrastructure entities [Section 10(23FE)]
o Investor’s income from foreign inves tment fund, which is relocated to IFSC [Section 10(23FF)]
Minimum Alternate Tax (MAT) on Capital Gains
- Applicable to foreign companies with a Permanent Establishment (PE) in India.
- Adjustments to book profit apply if capital gains are taxed at a lower rate than MAT.
TDS on Capital Gains for Non-Residents
- Sections 194LBB,194LBC, 195, 196B, and 196C govern TDS for capital gains paid to non-residents.
Return Filing Requirements
A non-resident must file an income tax return if his income is taxable in India. However, return filing is not required if:
- The non-resident individual, AOP, or BOI has total income (before specified exemptions/deductions) below the basic exemption limit.
- An NRI opts for the special regime (Chapter XII-A) and earns LTCG from a foreign exchange asset, provided TDS is deducted.
- Eligible foreign investor earning only capital gains from capital assets referred to inSection 47(viiab).