Tax Talk: Taxability rules for capital gains of non-residents

By Neha Malhotra

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The applicability of Indian tax laws is based on the residential status of a person rather than on citizenship. In case of an individual assessee, residential status is adjudged based on his physical presence in India. While a resident is taxed on his global income in India, a non-resident is taxed only on income accrued in India.

Transfer of a capital asset
The transfer of a capital asset situated in India instigates taxation in India. However, taxation is subject to relief available under the provisions of Double Taxation Avoidance Agreements (DTAA) between India and the country of residence of the non-resident.

Tax incidence under the head “Capital Gains” hinges on the type of asset and holding period. A ‘capital asset’ means property of any kind held by a taxpayer and includes shares or securities in any Indian company. However, personal effects, stock-in-trade, consumable stores or raw materials held for the purpose of business or profession, etc., are excluded from the scope. Sale, exchange, relinquishment of a capital asset or extinguishment of rights, connotes ‘transfer’ chargeable to tax in a financial year.

Classification of capital gains
Long-term capital assets are those held for over 36 months preceding the date of transfer. Immovable property or unlisted shares of an Indian company are classified as long-term capital assets if they are held for more than 24 months, else the same are treated as short term. Listed equity shares or units of equity-oriented funds are classified as long-term capital assets only if they are held for more than 12 months.

To compute capital gains on transfer of capital asset, one has to deduct cost of acquisition, cost of improvement and expenses (incurred wholly and exclusively in connection with the transfer) from the sale consideration. The resultant capital gains are either short-term or long-term depending on the period of holding. Cost of acquisition is indexed in case of long-term capital gains (LTCG) to account for inflation over the years.

For computation of capital gains on sale of shares or debentures of an Indian company, non-residents are permitted to convert cost of acquisition, expenditure incurred in connection with transfer and the sale consideration into the same foreign currency as was expended to purchase the same. The resultant capital gains are then reconverted into Indian currency. This method has been prescribed to counterbalance the effect of foreign exchange fluctuations. However, the benefit of indexation is not accorded to non-residents in this case.

Prescribed tax rates
LTCG are taxed at 20% (plus applicable surcharge and cess). However, gains on transfer of listed shares or units of equity-oriented mutual funds are taxed at 10% (without indexation or adjustment of forex fluctuation), if such gains are over Rs 1 lakh in a financial year and Securities Transaction Tax (STT) has been paid. Short-term capital gains (STCG) on sale of listed equity or units of equity-oriented mutual funds, on which STT has been paid, are taxed at 15%. STCG on transfer of other assets are taxable at applicable tax rates for individuals and at 40% in case of non-resident companies.

Transfer of capital gains to and by a non-resident may entail certain legal compliances. While the resident transferees are required to deduct and deposit tax at source to the government, non-resident transferors have to file return of income disclosing the particulars of transfer and the resultant capital gains. Non-compliance of statutory obligations may have penal consequences.

The writer is director, Nangia Andersen LLP. Inputs from Vasudha Arora