Rationalisation of taxation of capital gains on transfer of capital assets by non-residents by Finance Bill 2025
The Finance Bill, 2025, proposes several key changes in the Income Tax Act, 1961, to continue reforms in the direct tax system through tax reliefs, removing difficulties faced by taxpayers, and rationalizing1 various provisions. Here are some of the key changes:
Here are the key bullet points regarding the Finance Bill, 2025, proposal to rationalize the taxation of capital gains on the transfer of capital assets by non-residents:
Section 115AD: This section of the Income Tax Act, 1961, deals with the taxation of income from capital gains for specified funds and Foreign Institutional Investors (FIIs).
Concessional Rate: Currently, long-term capital gains arising from the transfer of securities (other than units referred to in section 115AB) are taxed at a concessional rate of 10% for these entities.
Parity with Residents: The Finance (No. 2) Act, 2024, brought the tax rate for long-term capital gains on listed equity shares and units of equity-oriented funds (covered under Section 112A) to 12.5% for all assessees, including non-residents. However, the 10% rate was retained for long-term capital gains not covered under Section 112A.
Proposed Change: The Finance Bill, 2025, proposes to amend Section 115AD to tax all long-term capital gains on the transfer of securities (not covered under Section 112A) at a uniform rate of 12.5% for specified funds and FIIs.
Effective Date: This amendment will take effect from April 1, 2026, and will apply to Assessment Year 2026-27 and subsequent years.
Rationalisation of taxation of capital gains on transfer of capital assets by non-residents
The existing provisions of Section 115AD of the Act provide that where the total income of a
specified fund or Foreign Institutional Investor includes—
(a) income received in respect of securities (other than units referred to in section 115AB); or
(b) income by way of short-term or long-term capital gains arising from the transfer of such
securities,
the income-tax on the income by way of long-term capital gains referred to in clause (b), if any,
included in the total income, shall be calculated at the rate of ten per cent.
2. Certain amendments were carried out in the above provisions by the Finance (No.2) Act, 2024.
The rate of taxation on long-term gains arising from the transfer of capital assets was amended to
twelve and one-half per cent in the case of all assessees, whether resident or non-resident, with effect
from 23.07.2024. It was seen that while the rates of taxation in the case of specified fund or FIIs in case
of long-term gains referred to in section 112A have been brought to parity with the rates applicable for
residents, the rate of income-tax calculated on the income by way of long-term capital gains not
referred to in section 112A were retained at ten per cent vide Finance (No.2) Act, 2024.
3. It is proposed to amend the provisions of section 115AD to provide that income-tax on the
income by way of long-term capital gains on transfer of securities (other than units referred to in section
115AB) not referred to in section 112A, if any, included in the total income, shall be calculated at the
rate of twelve and one-half per cent.
4. These amendments will take effect from the 1st day of April, 2026, and shall accordingly, apply
in relation to the assessment year 2026-27 and subsequent assessment years.
[Clause 23]