Taxation of Capital Gains on sale of securities by Non-Resident Individuals

Any profit and loss arising from transfer (viz, sale, exchange, release, relinquishment, etc.) of a Capital Asset termed as Capital Gain (CG) and it shall be chargeable to Income tax under the head “Income from Capital Gains” during the year of transfer, subject to certain exceptions.

The term 'Capital Asset' includes Shares, Units of Mutual Funds, Bonds, Debentures, Movable and Immovable property, as defined under the Act. However, this note specifically addresses the taxability of CG on the sale of Equity shares, Mutual Fund, Bonds, Debentures, Gold, ETFs and Other Capital Assets in India (referred to as 'Capital Assets' hereafter).

The taxability of CG with respect to aforesaid Capital Asset depends on the Nature of gain, i.e., whether short-term or long-term. Hence, to determine the taxability, capital assets are classified into short-term capital asset and long-term capital asset, which is explained in below points.

A.  Classification of Capital Assets:

Classification of Capital Assets are based on period for which it is held by NRI and we have tabulated below general principles which determine whether Capital Assets would qualify as short-term capital asset (STCA) or long term capital asset (LTCA). These principles remain the same for both individual resident in India or NRI.

Note 1: Unlisted bonds or Unlisted debentures are now covered under the special taxation regime of deemed Short-term Capital Gains irrespective of period of holdings and shall be taxed as per the applicable slab rates.

B.  Classification of Capital Gain

Long term Capital Gain (LTCG): Capital gain arising from the transfer of a LTCA is termed as LTCG.

Short term Capital Gain (LTCG): Capital gain arising from the transfer of a STCA is termed as STCG.

C.  Tax rate applicable to NRI on CG arising on sale of Capital Assets in India-

Sr. No.	Capital Asset Type	Assets transferred before July 23, 2024*	Assets transferred on or after July 23, 2024*
Short-term Capital Gains- Rates of Taxation
1.	Listed Equity Shares, Units of Equity Oriented Mutual Funds and Business Trust	15%   [provided Securities transaction tax (STT) is paid on sale of shares**]	20%   [provided Securities transaction tax (STT) is paid on sale of shares**]
2.	ALL other Capital assets	As per slab rates of tax$	As per slab rates of tax$
Long-term Capital Gains- Rates of Taxation (Refer Note 4)
1.	Listed Equity Shares, Units of Equity Oriented Mutual Funds and Listed Business Trust   (provided STT paid on sale as well as on acquisition of shares and STT is paid on Sale of Units of Equity Oriented Mutual Funds and Listed Business Trust, subject to exceptions**)	10%# (Without indexation and with Grandfathering: Refer Note-1 below)	12.5%# (Without indexation and with Grandfathering: Refer Note-1 below)
2	Unlisted Shares	10% (without indexation and no benefit of foreign exchange fluctuation)	12.5% (without indexation and no benefit of foreign exchange fluctuation)
3	Listed Shares (STT not paid and not covered under exceptions for STT payment)	20% (Indexation)   10% (without Indexation)	12.5% (Without Indexation)
4	Units of Equity Oriented Mutual Funds and Listed Business Trust (STT not paid)	20% (Indexation)	12.5% (Without Indexation)
5	Specified Mutual Funds acquired on or after April 1, 2023 and Market Linked Debentures (Refer Note 2 and Note 3)	Not applicable as termed as Deemed STCG	Not applicable as termed as Deemed STCG
6.	Listed Bonds and Debentures	10% (Without indexation)	12.5% (Without indexation)
7.	Unlisted Bonds and Debentures	10% (without indexation and no benefit of foreign exchange fluctuation)	Not applicable as termed as Deemed STCG
8.	Gold and Other Capital Assets	20% (with indexation)	12.5% (without indexation)

* Plus applicable Surcharge and Health and education cess on above rate of Income-tax.

** Condition of STT as referred above is not applicable where transaction is undertaken on a recognized stock exchange located in any International Financial Services Centre and where the consideration for such transaction is paid or payable in foreign currency.

# Long term capital gain will be chargeable to tax only if such long-term capital gain in aggregate exceeds Rs. 1.15 lakhs.

$ Refer FAQ-8 of FAQ on TDS and Tax liability in India.

Note-1:

Tax @10% on LTCG from sale of listed equity share of a company or a unit of equity-oriented fund or a unit of business trust was introduced from 1 April 2018. However, if capital asset is purchased before 1 February 2018 and sold after 31 March 2018, all appreciation/gains upto 31 January 2018 will be grandfathered and accordingly appreciation/gain amount upto 31 January 2018 is exempted from tax. Effectively, holders of such capital assets are liable to pay tax on LTCG only on CG over and above Fair Market Value (FMV) as on 31 January 2018 of such capital asset.

Note-2: 

Mutual funds are classified as under:

Note-3:

• "Market Linked Debenture" means a security by whatever name called, which has an underlying principle component in the form of a debt security and where the returns are linked to market returns on other underlying securities or indices and include any security classified or regulated as a market linked debenture by the Securities and Exchange Board of India;
  
  
• As per recent amendment, Capital gain arising on Sale of Market Linked Debentures sold on/after April 1, 2023, shall be deemed as short-term capital gain.
  

Note 4:

The rates presented in the above table adhere to the Normal Income tax provisions. However, NRI have the flexibility to choose a special taxation regime for their long-term capital gains from specified assets, as detailed in the tax rates specified within that regime, subject to fulfillment of specified conditions prescribed therein. One may refer to "Special provisions relating to Taxation of Income of NRI" under our services.

D.  Manner of Computation of CG:

     Capital gain arising on account of transfer of capital asset shall be computed as follows: 

Note 1:

If there are any capital gains arising from the transfer of a capital asset being shares (other than listed equity shares where STT is paid), or debentures, of an Indian company, and the above table in point C, does not specifically mention any restriction on foreign exchange fluctuation benefit, any investment or expenditure in such shares or debentures made in foreign currency allows the NRI to claim foreign exchange benefit as prescribed under the Act.

Note 2:

Indexation is a process by which the cost of acquisition is adjusted against inflationary rise in the value of asset. For this purpose, Central Government notifies cost inflation index for each Financial Year. The benefit of indexation is available only to certain specified long-term capital assets. So, no benefit of indexation is available to Short term Capital Asset. For computation of indexed cost of acquisition following factors are to be considered:

·         Year of acquisition

·         Year of transfer

·         Cost inflation index of the year of acquisition/improvement

·         Cost inflation index of the year of transfer

The Capital Gains (CG) arising from the transfer of a capital asset in India are taxable in India; however, they may also be subject to taxation in the country of residence of the NRI. In such a scenario, the NRI may avail the benefits, in any, provision of the Double Taxation Avoidance Agreement (DTAA) executed between India and their residence country. These provisions may allow for a lower tax rate, exemption from tax, and/or credit for taxes paid in either of countries (i.e., Resident/Source) to ensure that the NRI does not pay double tax on the same income in both countries, subject to specific compliance requirements.

Ø  Adjustment of LTCG and STCG against Basic Exemption Limit

  Ø  Re-investment benefit availability on LTCG