Capital gains on shares purchased in foreign currencies do not benefit from an indexation advantage


What is the tax rate for long-term capital gains on the disposal of listed preferred shares for non-residents? Is it 20% or 10%, with or without indexation?

– Anonymous

It is assumed that the question concerns the shares of an Indian company. There can be two scenarios – either the shares are purchased in foreign currency or in Indian currency by the non-resident.

If the shares are purchased in foreign currency, the capital gain is calculated in foreign currency and then converted into Indian currency. In this case, the benefit of cost indexation is not available, however, the applicable tax rate will be 10% plus the applicable surcharge and tax.

Authorization to buy Indian stocks in foreign currency is governed by the Foreign Exchange Management Act (FEMA), 1999, related rules / regulations and IDE guidelines. Subject to the above being observed, it may happen that a foreign investor can buy shares of an Indian company in foreign currency.

If the shares are purchased in Indian currency, there is no requirement for conversion / re-conversion of the capital gain in foreign currency. The capital gain is calculated according to the sale price and the acquisition cost in INR. The taxpayer will be able to choose the lower between the tax rate of 20% with indexation and 10% without indexation.

In the case of equity-oriented listed units, long-term capital appreciation (LTCG) will be taxed under section 112A of the law (provided that the securities transaction tax is paid at the time of the sale). LTCG exceeding ??1 lakh will be taxed at 10% without any cost indexation. In addition, in the event that the units were purchased before January 31, 2018, the benefit of acquired rights will also be taken into account when calculating capital gains (i.e. the difference between the market price as of January 31, 2018 and the purchase price will be considered tax exempt).

In the case of listed debt oriented units, the LTCG will be taxed at 20%. The benefit of cost indexation must be available. Please note that debt oriented units will only be considered “long term” after 36 months holding period.

In the case of unlisted funds, whether equity-oriented or debt-oriented, capital gains will be taxed at 10% without indexation, in the case of a non-resident seller.

Additionally, if the petition is for foreign stocks, it should be noted that foreign stocks, even if listed on a stock exchange outside India, will be treated as unlisted for tax purposes in India and that the tax rates applicable to unlisted shares will apply.

-Response from Shailesh Kumar, Partner, Nangia & Co LLP. Send your questions to [email protected]

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