Tax implications on capital gains realized by NRIs

Taxation depends on the residence status of the individual. For example, a resident taxpayer must pay tax on his aggregate income; however, a Non-Resident Indian (NRI) is only subject to income tax on income from Indian sources.

NRIs can invest in stocks and mutual funds, as long as they comply with the provisions of the Foreign Exchange Management Act (FEMA).

The capital gains tax provisions for NRIs are similar to those applicable to resident individuals, except for the applicability of the TDS provisions. Like resident investors, the taxation of capital gains also depends on the length of ownership and the nature of the investments sold.

Types of investments and their tax implications;

Capital gains on equity and assimilated instruments by NRI
For listed equities, equity-focused fund units or corporate trust units and zero coupon bonds, a holding period of more than 12 months is considered long-term, while a period of less than 12 months is considered long-term. 12 months is considered short term. Gains on the sale of long-term assets would be considered long-term capital gains (LTCG), and gains from the sale of short-term assets would be considered short-term capital gains (STCG ).

For NRIs, the LTCG on equities and equity-focused investments is taxable at 10 percent exceeding the exemption of Rs.1 lakh. The securities transaction tax (STT) must have been paid to sell stocks or shares. It should be remembered that no indexation advantage is authorized on the acquisition cost for equity-based investments. Investors can increase the cost of acquiring stakes until January 31, 2018 by using the grandfather rule.

Short-term capital gains from stocks and equity-focused investments are taxable at the fixed rate of 15 percent.

Capital gains on unlisted shares and real estate by NRI
For shares and unlisted buildings, holding for more than 24 months is considered long term, and less than 24 months will be considered short term.

Long-term capital gains on unlisted stocks and real estate are taxable at 20 percent with indexation. Indexation increases the cost of assets while taking inflation into account.

Considering that the short-term capital gain on these assets will be added to other taxable income and taxed according to the individual slab rate. For example, if an individual has a 20 percent tax rate, then STCG will be taxable at 20 percent.

Taxability of debt funds and other fixed assets
For debt oriented funds, unlisted securities other than shares and any other capital asset, a period of more than 36 months will be considered long term, which will be considered short term.

Long-term capital gains on debt-focused investments or any other capital asset will be taxable at the rate of 20 percent with indexation. Short-term capital gains are added to other taxable income and taxed at the personal slab rate.

A 4 percent education and higher education tax will be added to the short and long term tax rates.

Tax exemptions available for NRIs:
The capital gain from the sale of a long-term residential property can be claimed as an exemption by purchasing a new residential house in India under section 54. Section 54 also allows a one-time option of invest in two houses against the sale of a residential property. , provided that the gain does not exceed Rs.2 crore.

Whereas the capital gains exemption on the sale of any long-term fixed asset other than residential property can be claimed under section 54F.

Under these two sections, NRI must purchase another residential property within one year before or two years after, or the construction of a new property within three years of the date of transfer of that long property. term. In addition, this exemption would be canceled if the new property is sold within three years of its purchase. In addition, there are other restrictions and conditions for claiming exemptions that taxpayers must adhere to.

Under section 54, only the capital gain must be reinvested to benefit from the exemption. However, under section 54F, the entire sales receipt must be invested. Otherwise, only a proportional exemption will be allowed.

NRI may also apply for exemption from capital gains tax by reinvesting the amount in specified bonds within six months from the date of transfer of such property (Article 54EC). However, under this section, a maximum exemption that can be claimed by investing is Rs.50 lakh.

Suppose your LTCG remains uninvested until the RTI deposit maturity date. In this case, taxpayers can deposit the amount into a capital gains account with the designated bank, which can then be withdrawn for investment within a specified time frame. Remember to invest the exact amount that you plan to take advantage of the exemption, as the remaining part will be subject to LTCG.

Advance the tax implications to the NRI
NRIs are also required to pay withholding tax if the estimated tax payable exceeds Rs 10,000 in a fiscal year. Interest under Articles 234B and 234C is applicable if you do not pay withholding tax.

Applicability of the TDS provisions to the NRI
NRIs are subject to TDS at the rates applicable on capital gains realized at the highest tax rates, regardless of any threshold value. The TDS rate is 10 percent on equity-related capital gains and 20 percent after indexation for non-equity investments.

Short-term capital gains from equity-focused investments are subject to a TDS of 15 percent plus applicable tax. At the same time, non-equity oriented investments (such as debt funds) are subject to a 30 percent TDS.

Double taxation relief
The non-resident can avoid the use of the DTAA (Double Taxation Avoidance Agreement) if India has a tax treaty signed with his country of residence. Under the convention, non-residents can (i) pay tax in any country or (ii) pay tax in both countries and claim DTAA relief in the country of residence.

In addition, NRIs do not have the option of adjusting their capital gains against the basic exemption limit of Rs 2.5 lakh.

As we all know, an individual is only subject to tax if the total taxable income exceeds the ceiling of the basic exemption. In addition, in the case of residents, if LTCG or STCG is below the basic exemption limit, this shortfall can be offset by long-term and short-term gains. However, non-residents cannot make up for this shortfall. Thus, a non-resident must pay the total capital gains tax even if his income is below the ceiling of the basic exemption.

In addition, we must not forget that the deduction under Chapter VI-A is not available on capital gains income.

by Archit Gupta, Founder and CEO of Clear (formerly Cleartax)