Capital Gains Taxation for NRIs in India

Capital gain is the result of the sale of a capital asset for a price greater than the price at which it was purchased. Capital gain taxation in India is complex and varies depending on the nature of the capital asset sold, the period of holding, and the residential status of the person involved in the transaction. The following blog deals with the capital gain implications for NRIs.

Who is an NRI?

In India, the first step in determining the taxable income of the assessee is determining the assessee's residential status. There are three kinds of residential status for individuals:

• Resident and Ordinarily Resident
• Resident but not Ordinarily Resident
• Non-Resident.

Interestingly, there are special provisions applicable to non-residents in certain cases. Also, there are a few instances where the benefits available to residents are not available to non-residents. Let us understand in detail the scenarios in which the capital gain taxation for NRIs differs from that for residents.

Foreign Currency Conversion - First Proviso to Section 48

• When an NRI sells Indian shares or debentures, the sale consideration, transfer expenses, and cost of acquisition shall be in terms of the prescribed foreign currency rate.
• The resultant capital gain is converted back into Indian currency and is taxed accordingly.
• The provisions are covered in the first proviso to section 48, read with rule 115A.
• The following table demonstrates the prescribed foreign currency conversion rates.

Note:

• When you apply special capital gain provisions under sections 111A and 112A, the aforesaid provisions are not applicable.
• When the first proviso to section 48 applies, indexation is not applicable.

Capital Gains on Sale of Specified Investments - Section 115F

Meaning of Specified Securities

Section 115C talks about the meaning of specified investments. It includes:

• Shares in an Indian company;
• Debentures issued by an Indian public company;
• Deposits with an Indian public company;
• Any security of the Central Government;
• Such other assets as are notified.

Meaning of Foreign Exchange Asset

If the assessee has acquired such securities in foreign currencies, it is termed a foreign exchange asset. 

Taxation of Specified Securities - Section 115E

• As per Section 115E, long-term capital gain on the sale of specified assets is taxed at 12.5%.
• While the indexation benefit is not available, the assessee can avail the benefit of calculating the capital gains in foreign currency as described in the first proviso to section 48.
• However, short-term capital gain on the sale of specified assets is taxable under the normal provisions of the act. 
• That is, if it is listed on the Indian Stock Exchange, it is taxed at 20%; otherwise, it is taxed under the applicable slab rates. 

Exemption under Section 115F

As per section 115F, non-residents are eligible for an exemption on capital gains on such foreign exchange securities on satisfaction of certain conditions, as follows:

• Within six months of the sale of a foreign exchange asset, if he invests the sale proceeds in a specified asset or specified savings certificates, the capital gains would be exempt.
• If he invests all his sale proceeds (sale consideration less transfer expenses), the whole of the capital gains is exempt.
• If he invests less than his sale proceeds, the proportionate capital gains would be exempt; the quantum of exemption can be arrived at using the following formula:

Exempt capital gains = Total capital gains * Amount reinvested / Total Net Sale consideration

Note: 

• For the aforesaid foreign exchange assets, indexation benefits are not applicable.
• If the new asset purchased is sold within 3 years of its purchase, the amount exempted earlier shall be taxable under the head capital gains in the year of such sale.

Taxation Options for Returning NRIs

• As already discussed, the aforesaid provisions apply only to a non-resident. 
• However, assesses who were non-residents in the preceding assessment years and filed their ITR as residents in the relevant assessment year can avail this tax benefit for capital gains on foreign exchange assets until the year of sale.
• By doing so, they can avail of the exemption and the special tax rate available exclusively to non-residents, even after becoming residents.

Capital Gain Taxation of Global Depository Receipts

• As per the provisions of Section 115AC of the Income Tax Act, long-term capital gains on the sale of Global Depository Receipts and specified bonds are taxable at 12.5%.
• Specified bonds are those:
  • Issued by an Indian Company under the Central government schemes (or)
  • Issued by public sector companies,
  • Purchased by the non-residents in foreign currency
• The benefit of indexation and calculation of capital gains in foreign currency is not allowed for long-term capital gains on GDRs.

Taxation of Capital Gains on Other Assets for NRIs

• The above are popular provisions that apply exclusively to capital gains earned by non-residents.
• If the capital gains under question are not covered under any special provisions, then they are taxed at a rate similar to that of residents. 

TDS on Capital Gains for NRIs

The TDS rates for capital gains income for non- residents are as follows:

Note: As a thumb rule, TDS for NRIs is always deducted after factoring in the applicable surcharge and cess. 

Impact of DTAA on Capital Gains Tax for NRIs

• A non- resident can have capital gain implications in two countries, 
  • One in which the capital gain income has arisen (in this case, India) - Source country
  • One in which he is resident - Residence country
• When tax implications arise in two countries for a single transaction, the taxpayer can benefit from the Double Taxation Avoidance Agreement (DTAA). 
• As per the DTAA between the two countries, the assessee can pay taxes in one country and claim an exemption in the other.
• Or he can pay taxes in both countries and claim relief for taxes paid in the other country.
• There are specific documentary requirements that the NRI must furnish to claim the benefits, such as a tax residency certificate, a tax identification number, proof of taxes paid, etc.
• Section 90 and 91 of the Income Tax Act deals with provisions related to DTAA.

Filing Requirements and Compliance for NRIs

The NRI need not file a return of income if:

• His income only contains investment income or long-term capital gain income from the specified assets.
• TDS has already been deducted from the aforementioned income.

Common Mistakes NRIs Should Avoid

NRIs should be aware that, although they do not reside in India, any income they earn in India falls within the ambit of the Income Tax Act. Ignoring the return filing requirements and escaping the tax consequences can result in unnecessary hassle with tax authorities, including notices and hefty penalties. Knowledge of special provisions applicable to NRIs helps them claim exclusive benefits wherever applicable and, more importantly, avoid availing benefits exclusively available to residents.