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, and Debentures (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 is 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.

* Others include Units of Mutual Funds - Debt Mutual funds and specified mutual fund acquired before April 1, 2023 {Explained below in Point C}, Unlisted Debentures, etc.

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 following Capital Assets in India.

* 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 Lakh.

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

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:

·      As per recent amendment, Benefit of Indexation for the calculation of Long-term capital gains on “Specified Mutual Funds” will not be available for Investment made on or after April 1, 2023, and Gain arising from such type of Mutual fund will attract tax as per Normal tax rate as per slab applicable to an Individual.

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. Therefore, no Benefit of Indexation shall be available.

Note 4:

When analyzing the tax implications of long-term capital gains, it's crucial to consider the computational mechanism stipulated under the Income Tax Act. The rates presented in the table above adhere to the Normal Income tax provisions. Nevertheless, Non-Resident Indians 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 particular regime. 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

Indexed cost of acquisition is computed with the help of following formula:

           Cost of acquisition × Cost inflation index of the year of transfer of capital asset

                                    Cost inflation index of the year of acquisition

E.  Other Important aspects in relation to CG from transfer of aforementioned Capital assets.

Ø  Computation of FVOC for unlisted shares (i.e., not listed on recognized stock exchange in India):

In the case of the sale of unlisted shares, if the sale consideration received is less than the Fair Market Value (FMV) of such unlisted shares determined in the manner prescribed under the Income-tax rules, then the sale consideration to be considered for calculating capital gains shall be the FMV so determined, and not the actual sale consideration.

Ø  Capital Gain on transfer of Capital asset by way of Gift to Relative* and/ or Inheritance

Capital Assets transferred by way of Gift to Relatives or transfer under will (i.e. Inheritance) (‘Transferee’) are not subject to income tax at the time of Gift/Inheritance in the hands of Transferor and Transferee.

However, on subsequent sale of such gifted/inherited Capital Assets by the Transferee, tax is payable in the year in which sale takes place. Further, the cost of acquisition for transferee in this case shall be original cost to the previous owner who acquired it, and period for which capital asset was held by previous owner shall be included in the calculation of period of holding. Accordingly, it is essential to keep accurate records of investment originally made by the previous owner.

* Refer Definition of Relative in FAQ-9 of FAQ on Gift.

Ø  Set-off and carry forward of capital loss

Long-term capital loss cannot be set off against any income other than income from long-term capital gain. However, short-term capital loss can be set off against long-term or short-term capital gain.

Further, if, in a particular Financial Year (FY), the amount of Short/Long Term Capital loss is not fully set-off against capital gain, then such loss may be carried forward to subsequent years. In the subsequent year(s), such loss can be adjusted only against income chargeable to tax under the head “Capital gains”. However, long-term capital loss can be adjusted only against long-term capital gains. Short-term capital loss can be adjusted against long-term capital gains as well as short-term capital gains.

Such loss can be carried forward for eight years immediately succeeding the FY in which the loss is incurred. Such loss can be carried forward only if the return of income/loss of the FY in which loss is incurred is furnished on or before the due date of furnishing the return, as prescribed under section 139(1) of the Act.

Ø  Income Tax return filing and claim of Excess Tax Deducted. 

Tax deducted at source (TDS) on CG arising from the transfer of the aforementioned capital asset can be claimed as a credit against the overall tax liability. If the overall tax liability is lower than the TDS amount, then one may be eligible to receive a refund for the excess TDS deducted.

It is important to note that filing of ROI is necessary for claiming any refund of excess tax paid (if any).

Ø  Benefit Under Double Tax Avoidance Agreement (DTAA)

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

A NRI can offset capital gains against the basic exemption limit only if the capital gain is a Short-Term Capital Gain (STCG) chargeable to tax at slab rates, as mentioned in the table above in point C.

Consequently, any capital gain other than the one mentioned above, no adjustment of the basic exemption limit shall be allowed.

Ø  Availability of deduction under Chapter VI-A (i.e. Investment in LIC, PPF, Mediclaim etc.)

A NRI can avail deduction under Chapter VI-A against any income from STCG which is chargeable to tax at slab rates, as mentioned in the table above in point C.

Consequently, on any capital gain other than the one mentioned above, no deduction under Chapter VI-A shall be available.

 Ø  Re-investment benefit availability on LTCG

A NRI can avail exemption from tax on Long term capital gains arising from Sale of aforementioned long term capital asset by reinvesting the Net sale consideration, in Residential House property in India, subject to fulfillment of other certain prescribed conditions under the Act.

For detailed information on the prescribed conditions to avail this tax exemption benefit, please refer to "Capital gains tax exemptions on reinvestment" in Immovable property tab under our services.

                                                                                                                                                                         - Updated 04/2024