NRI Taxation » Capital Gains
Non-resident persons have been given a special status under the incometax law. Besides the general provisions for computation of long-term capital gains and the tax liability thereon, contained in section 48 and section 112,Chapter XII-A (comprising of sections 115C to 115-I) contains special provisions relating to certain incomes of non-resident Indians (NRIs) contains special provisions relating to certain incomes of non-resident Indians (NRIs).
Section 115AC makes provision for tax on income from bonds or shares purchased in foreign currency or capital gains arising from their transfer’. Besides, the provisions of Section 115A have been extended to non-residents, besides foreign companies, regarding tax on dividends, interest on foreign currency debts and income from units of mutual fund. In this Chapter we shall discuss the various provisions relating to tax on capital gains arising to non-resident.
Under the Income-Tax Act, a person is non-resident in India in any previous year, if he satisfies any of the following conditions:
(a) If he was in India for less than 365 during the four preceding years and for less than 182 days during the previous year; or
(b) if he was in India for 365 days or more during the four preceding years and for less han 60 days during the previous year.
Note: The period of 60 days referred to in condition (b) above, shall be substituted by 182 days, in case of an Indian citizen who leaves India in any previous year as a member of crew of an Indian ship or for the purpose of employment outside India, and in case of an Indian citizen or a person of Indian origin who is outside India and who comes on a visit to India in any previous year.
The residential status of a person is to be determined for every previous year. A person may be resident in a previous year and non-resident in the following year, or vice versa.
Computation of Capital Gains arising to Non-residents
In the present scheme of the Income-tax Act, three sets of provisions exist for computation and taxation of capital gains (and certain other incomes too) arising to non-residents.
- General Provisions (Sections 48 and 112) wherein the procedure for computation of capital gains on transfer of shares/debentures is different from that on other assets
- Special Rate of Tax on Income and Capital gains from Euro Issues/ GDRs. (Sec. 115A and 115AC).
- Special Provisions for Taxation of NRIs having income from-tax Act.)
1. General Provisions
Computation of Capital Gains on transfer of Shares/Debentures
Capital gains arising from the transfer of a capital asset being shares in, or debentures of, an Indian company shall be computed by converting the cost of acquisition, expenditure incurred wholly and wholly and exclusively in connection with such transfer and the full value of the consideration received or accruing as a result of the transfer of the shares or debentures, into the same foreign currency as was initially utilised in the purchase of the shares or debentures, into the same foreign currency as was initially utilised in the purchase of the shares debentures, and the capital gains so computed in such foreign currency shall be reconverted into Indian currency. Moreover, the aforesaid manner of computation of capital gains shall be applicable in respect of capital gains accruing or arising from every re-investment thereafter in (and sale of ), shares in or debentures of, an Indian company. [Sec. 48, First Provision]
This provision intends to protect non-residents from fluctuation of rupee value against foreign currency, in order that he pays tax only on the actual capital gains in foreign currency and not on the gains computed in rupees.
However, in such cases the benefit of indexation will not be available for the cost of acquisition.
The provision has been extended w.e.f. A.Y. 1993-94 to all non-resident assessees. (Upto A.Y. 1992-93, this benefit was available to non-resident Indians only).
For the purposes of this provision ‘foreign currency’ and ‘Indian currency’ shall have the same meanings as assigned to them under the FERA. Thus, ‘foreign currency’ means any currency other than Indian currency and ‘Indian currency’ means currency which is expressed or drawn in Indian rupees but does not include special bank notes and special one rupee notes issued under section 28A of the Reserve Bank of India Act, 1934.
The conversion of Indian currency into foreign currency
The conversion of Indian currency into foreign currency and the reconversion of foreign currency into Indian currency shall be at the rates of exchange prescribed in this behalf by the CBDT,
(a) the cost of acquisition of the capital asset shall be converted at the average of the telegraphic transfer (T.T.) buying rate and T.T. selling rate of the foreign currency initially utilised in the purchase of the said asset as on the date of its acquisition.
(b) the transfer expenses and the full value of consideration shall be converted at average of the T.T.buying rate and T.T. selling rate of the foreign currency initially utilised in the purchase of the said asset, as on the date of transfer of the capital asset.
(c)capital gains computed in the foreign currency, shall be converted into rupees, at the T.T. buying rate of such foreign currency, as on the date of transfer.
Computation of Capital Gains on transfer of other Capital Assets
Capital gains arising from the transfer of capital assets other than shares in, or debentures of, an Indian company, shall be computed in the usual manner, by deducting cost of improvement and expenditure incurred in relation to such transfer from the total sale consideration. However, for computing capital gains on transfer of ‘long-term capital assets’. ‘Indexed Cost Acquisition’ and ‘Indexed Cost of Improvement’ shall be considered.
Rates of Taxes on Capital Gains
SHORT-TERM CAPITAL GAINS
Income arising from ‘Short-term Capital Gains’ is included in the gross total income of the gross total income of the assessee and after allowing deductions under Chapter VI-A, the total income is subject to tax at the normal rates in force for that assessment year. (See Annexure16.1). Rebate under Section 88 is available from the tax computed on the total income in respect of deposits/payments made in the approved schemes and instruments.
As per section 112 long-term capital gains are subject to a flat rate of income-tax @20%.
LONG-TERM CAPITAL GAINS
However, in case of long-term capital gains arising on transfer of listed securities (except shares and debentures) or units of UTI or mutual funds, the amount of tax shall be restricted to 10% of the capital gain computed without giving the benefit of indexation.
Deductions under Chapter VI-A and rebate under Section 88 will not be available in respect of long-term capital gains and the tax payable thereon. Income other than long-term capital gains will be subject to tax at the normal rates in force.
In the case of an individual or a Hindu undivided family the basic exemption limit of Rs. 50,000 shall first be allowed against total income as shall be allowed against such long-term capital gains. For details refer chapter ‘Computation of Capital Gains and Tax liability’.
For examples on computation of capital gains refer para ‘Computation long-Term Capital Gains Relating to a Foreign Exchange Asset in the Non-resident Indians (NRIs).
2. Special Rate of Tax on Income and Capital Gains from Euro Issues/GDRs [Secs. 115A and 115AC ]
With a view to increasing the inflow of foreign exchange into India, the Government has permitted issue of convertible bonds and equity shares abroad, by established Indian companies. The bonds/shares shall be denominated in foreign currency and shall be subject to a special treatment under the Income-tax Act.Besides, non-residents have now been placed at par with foreign companies, in respect of taxation of dividends, interest on foreign currency debts and income from units of notified mutual funds.
The special provisions are applicable to all non-residents in respect of their income by way of :
(a) dividends [which have not been subjected to additional incometax in the hands of company u/s 115-O] [other than those mentioned in clause (d) below]
(b) interest received from Government or an Indian concern on foreign currency debts;
(c) income received in respect of units, purchased in foreign currency, of a mutual fund notified u/s 10(23D) or of the Unit Trust of India
(d) interest or dividends [which have not been subjected to additional Income-tax in the hands of company u/s 115-O] in respect of specified bonds or shares (see below) or inrespect of bonds or shares of a public sector company sold by the Govt. to the non-residents in foreign currency; or
(e) long-term capital gains arising on transfer of the bonds/shares aforesaid.
Specified bonds or shares
The provision shall apply to the bonds or shares issued by an Indian company in accordance with the specified scheme [i.e. Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipt Mechanism) Scheme, 1993] of the Central Government and purchased by a non-resident assessee in foreign currency. These are popularly known as Euro Issues/GDRs.
This provision is also applicable in case of shares or bonds in an amalgamated or resulting company, acquired in accordance with the above scheme. [Sec. 115AC}
Transfer of bonds or shares to another non-resident
A transfer of the specified bonds or shares, made outside India to another non-resident, shall not be regarded as a transfer [vide section 47 (viia)]. Thus. no tax shall be payable on capital gains arising from such transfer.
No deductions to be allowed
While computing the aforesaid incomes (whether by way of interest or dividends or long-term capital gains), the following points must be considered
(1) In computing the interest or dividend income no deduction in respect of any expenditure shall be allowed under sections 28 to 44C or under section 57 of the Act
(2) In computing the long-term capital gains, the protection against exchange rate fluctuation and against inflation available under the first and second provisos to section 48, shall not be allowed
(3) No deduction under Chapter VI-A shall be allowed where the gross total income consists only of the incomes as aforesaid. In other cases, the deduction under Chapter VI-A shall be allowed from the gross total income as reduced by such incomes, as if such reduced amount was the gross total income as reduced by such incomes, as if such reduced amount was the gross total income of the assessee.
(4) The unabsorbed capital losses brought forward from earlier years shall be allowed to be set off against ‘ long-term capital gains’ from specified bonds/shares.
Tax Payable
In case of a non-resident, the income-tax payable shall be the aggregate of-
(i) 20% of the income specified in clauses (a), (b) and (c) above
(ii) 10% of the interest or dividend income in respect of specified bonds or shares mentioned in clause (d) above
(iii) 10% of the long-term capital gains arising from the transfer of the afordable shares mentioned in clause (e) above; and
(iv) income-tax chargeable on the total income as reduced by the amount of incomes referred to in clauses (a) to (e) above, at the normal rates.
Return of Income
A non-resident is not required to furnish his return income u/s 139 (1) if-
(a) his total income for the previous year consists only of incomes specified in clauses(a) to (e) above;and
(b) the tax has been deducted at source on such income in accordance with the relevant provisions. [Sec. 115A(5) and 115AC(4)]
Sections 115A and 115AC are Mandaroty for Non-residents (Other than NRI’s)]
The provisions of sections 115A and 115AC (for taxation of dividends, interest on foreign currency debts, income received in respect of units of a mutual fund, income from bonds or shares purchased in foreign currency or capital gains arising from their transfer) are mandatory for non-residents (other than non-resident Indians). Non-resident Indians, however, have an option of being assessed either under the special provisions of Chapter XII-A or under the provisions of sections 115A and 115AC. In their case, the provisions of sections 48 and 112 shall apply only where sections 115A and/or 115AC are not applicable and option to be assessed under Chapter XII-A is not exercised.
3. Special Provisions for Taxation of NRIs having Income from Foreign Exchange Assets (Chapter XII-A of Income -tax Act)
Applicability
The special provisions of taxation contained in Chapter XII-A are applicable to a non-resident Indian’ who is an individual, being a citizen of India or a person of Indian origin, not resident in India, having ‘investment income’ or ‘long-term capital gains’ or both from a ‘foreign exchange asset’ [Sec. 115C(e)]
‘Investment Income’ means income derived from a foreign exchange asset [but excludes dividends subjected to additional income-tax in the hands of the company u/s 115-O.] ‘Capital gains’ means a capital gain from long-term foreign exchange asset. ‘Foreign exchange asset’ means any specified asset acquired or purchased with or subscribed to in ‘convertible foreign exchange’ (as defined under FERA, 1973). the specified assets are:
- shares in an Indian company.
- debentures issued bay public limited Indian company
- deposits with a public limited Indian company
- securities of the Central Government, and
- any other assets which the Central Government may notify in the Official Gazette in this behalf (NSC VI and VII issues had been notified under this provision; both of these issues have since been discontinued).
Income on shares in Indian companies, allotted in consideration for the machinery and plant delivered abroad, will attract liability to tax w.e.f. 1.5.1984.
This method is evidently intended to benefit the NRIs. In order that the benefit may be availed of. the investor has to be a non-resident Indian. as defined under the Income-tax Act. 1961 and not under the FERA. 1973.
Deductions Not Allowable:
(a) In computing the investment income (i.e. interest or dividend income derived from a foreign exchange asset), no deduction in respect of any expenditure or allowance shall be allowed under any provisions of this Act.
(b) In computing the long-term capital gains (arising on transfer of a foreign exchange asset) the benefit of ‘indexation’ available under second proviso to section 48 shall not be available on such long-term capital gains.
However, in case of shares/debentures of an Indian company the protection against exchange rate fluctuation (contemplated vide section 48 first proviso) shall continue to be available. For ‘computation of capital gains on transfer of shares/debentures’ refer to ‘General Provisions (sections 48 and 112)’ above
(c) Where the gross total income consists only of investment income or long-term capital gains (in respect of foreign exchange assets) or both, no deduction under Chapter VI-A shall be allowed. In other cases, the gross total income shall be reduced by such incomes and the deductions under Chapter VI-A shall be allowed against the gross total income so reduced [Sec. 115D]
Exemption from Capital Gains:
No capital gain tax is attracted on long-term capital gains arising from transfer of foreign exchange asset if the net consideration for the transfer is invested within six months in any specified asset or deposited in notified savings certificates. If investment in aforesaid specified assets is less than the net consideration, the exemption will be allowed on proportionate basis. In case where the new (specified) asset is transferred or converted into money within a period of three years from the date of its acquisition, the amount of capital gain exempted earlier will be regarded as long-term capital gains of the year in which the new asset is transferred o converted into money.
The ‘new assets’ in which the net consideration should be invested, are specified below : (vide Section 115E)
- Shares in an Indian company
- Debentures issued by an Indian company which is not a private company
- Deposits with an Indian company which is not a private company
- Any security issued by the Central Government
- Any savings certificates notified by the Central Government. [The national Savings Certificates (VI and VII Issues) have been notified for this purpose vide Notification No. SO 653(E), dated 8.9.1982 but the same have been discontinued]
- Any other asset that the Central Government may notify for this purpose [No such asset has been notified so far ]
Prior to 1.4.1989, deposit in the Non-resident (External) Account was also included as one of the ‘new assets’,but this has since been withdrawn. From the assessment year 1989-90 onwards, deposit of consideration in this Account will not entitle the assessee to the exemption.
The expression ‘net consideration’ means the full value of the consideration received or accruing as a result of the transfer, as reduced by any expenditure incurred wholly and exclusively in connection with such transfer. No other deduction will be allowed in determining the net consideration. Since the transferred asset is a movable asset [shares or debentures], the only conceivable expenditure that can be deducted will be brokerage or commission paid, or stamp duty paid for the transfer.
Quantum of Exemption
Where the entire net consideration is reinvested in a new asset, the entire capital gain is exempt from tax. Where only a portion of the net consideration is reinvested. then the exemption from tax is allowed on proportionate basis.
For transfers of foreign exchange assets effected before 1.4.1992, simultaneous exemption u/s 54E (along with exemption u/s 115F) would be available provided the conditions laid down in the respective provisions were satisfied. From A.Y. 1993-94, however, exemption u/s 54E is not available.
Rate of Tax
The investment income and long-term capital gains from [capital assets other than foreign exchange assets are chargeable to tax at flat rate of 20%.
W.e.f. A.Y. 1998-99 income by way of long-term capital gains from foreign exchange assets are chargeable to tax at the rate of 10%. For A.Y. 1997-98. the rate of tax was 20%.
Option not to be assessed under this special provision
Income from foreign exchange assets and long-term capital gains arising from such specified assets, would be treated as a separate block and charged at the rates mentioned above. The other incomes of non-resident in India will be treated as separate block and charged to tax in accordance with the other provisions of the Income-tax Act. The non-resident has option to be assessed or not to be assessed under special provision. The option will be made by a declaration at the time of filing Income-tax Return. [Sec. 115-I]
Non-resident when becomes Resident in India:
If a non-resident Indian becomes resident in India in the subsequent years, the special provisions of Chapter XII-A will continue to apply in relation to the investment income derived from specified assets except shares in an Indian company, until the transfer or conversion (other than by transfer) into money of such assets. [Sec. 115H]
Return of Income
A non-resident Indian is not required to furnish his return of income, if -
(a) his total income for that previous year consists only of investment income or income by way of long-term capital gains (from foreign exchange assets) or both ;
(b) the tax has been deducted at source on such income; and
(c) the assessee opts to be assessed under the special provisions of Chapter XII-A. [Sec. 115G]
Other Concessions available to Foreign Companies and Offshore Funds:
(a) Transfer of shares held in an Indian Company, in a scheme of amalgamation of foreign companies :Capital gains arising from transfer of any shares, held in an Indian company, by the amalgamating foreign company to the amalgamated company, shall not be chargeable to tax, if
(b) Tax on income from units purchased in foreign currency or capital gains arising from their transfer to an Offshore Fund : Section 115A provides for a special rate of tax in case of any income from units purchased in foreign currency on long-term capital gains arising from their transfer, to an overseas financial corporation (offshore fund).
Deduction of tax at Source on Long-term Capital Gain on Sale of Shares or Debentures of other specified Assets by Non-resident Individuals of Indian Nationality / Origin
Section 195 read with Section 204 of the Income-Tax Act requires authorised dealers to deduct income tax at source at a flat rate of 20% on long-term capital gains accruing to an NRI on the transfer of specified assets before remitting to him the balance sale proceeds or crediting such proceeds to his NR(E) / FCNR Account. For this purpose the production of No Objection or Tax Clearance Certificate from the Indian Income Tax authorities has been dispenses with and the authorised dealers have been issued the following guidelines before remitting such sums.
(1) The seller of shares is an NRI as defined in Chapter XII_A of the Income-tax Act.
(2) The shares/debentures / securities (i.e. the assets specified in Chapter XII-A of the Income-tax Act) where acquired by or on behal of the non-resident investor with repatriation benefits, in accordance with the special or general permission of Reserve Bank, out of remittance from abroad in foreign exchange or from the foreign origin funds held in the investor’s Non-resident (External) / FCNR account, and such assets are sold with the Reserve Bank’s specific or general permission or, in case of shares acquired under Portfolio Investment Scheme and sold through stock exchange,the sale / transfer of sahres is effected in accordance with Notification No. F. 10 /21 / 86-NRI Cell, dated 10th June,1986 issued by Government of India under Section19(6) of the Foreign Exchange RegulationAct, 1973. Where the sale of shares /debentures acquired by the on-resident investor directly from the companies concerned is made on repatriation basis with the specific permission of Reserve Bank and the Bank’s approval letter is produced, it will not be necessary for authorised dealers to verify that these assets were acquired by the seller by remittance in foreign exchange or out of foreign exchange funds.
(3) The bonus shares will be treated as foreign excahnge assets if the shares on the basis of which the bonus shares have been issued are “foreign exchange assets”as defined in Chapter XII-A of Income-tax Act.
(4) If the rights shares are purchased or subscribed to in convertible “foreign exchange assets” and,therefore, the long-term capital gains arising on the sale of this right will not be covered under the provisions of Chapter XII-A of the Income-tax Act.
(5) The non-resident investor has submitted a declaration by a letter to the authorised dealer to the effect that the asset sold by him was his bona fide long-term capital asset and not stock-in-trade.
(6) The specified capital asset sold by the non-resident Indian was held by him for a period of more than 36 months from the date of acquisition. For this purpose, the date of acquisition and sale may be determined in the following manner:
(a) In case the shares / debentures / securities were acquired by the NRI directly from the concernedcompany / Government, the date of acquisition will be the date ofissue as indicated in the realtive certificate.
(b) In case the assets (shares / debentures / securities) were purchased by the NRI through stoc exchange, the date of acquisition of the asset by the NRI (i.e. the date from which the capital asset has been “held” by him) will be the date when the asset together with the transfer document completed in all respect is handed overto the NRI or his agent.
(c) The date of ‘transfer’ of the capital asset, being a foreign exchange asset will be the date of which the asset together with transfer documents complete in all respects is handed over to the buyer or his agent.
Note : The date of acquisition / transfer in case covered by item (b) or (c) above., will have to be verified by the authorised dealer by examining the relevant facts. For this purpose, besides the declaration given by NRI seller / his agent / broker regarding the date of acquisition / transfer, the authorised dealer may see whether the payment for the asset was made near about the claimed date. If ther is a considerable time-lag between the claimed date of acquistion / transfer and the date of payment, the case will require further examination. Thus, if the date of acquisition is very much earlier than the date of payment or the date of transfer is long ater the date when payment is received, the authorised dealer will have to examine the matter further and act accordingly.
A non-resident entitled to recieve any sum on which tax is required to be deducted at source (as stated above), may make an application in Form 15C (for banking companies) or Form 15D (for other non-residents), to the Assessing Officer for the grant of a certificate authorising him to receive such sum without deduction of tax at source. The Assessing Officer shall grant a certificate in Form 15#. The person responsible for paying such sum to the non-resident shall make such payment without deducting tax, so long as the certificate is in force.
The authorised dealers are also required to send within 14 days of the date of deduction of tax, a statement in form No. 27 to the Income-tax Officer having jurisdiction to assess the authorised dealer concerned. A statement showing the computation of capital gains in each case, should also be sent to the Income-tax Officer ahving jurisdiction over the authorised dealer, along with Form No. 27.
Failure to deduct tax at source attracts a penalty u / s 271C for a sum equal to the amount of tax not so deducted. BEsides, interest shall be chargeable on the tax deductible, till the date it is actually paid u / s 201.
The above instructions will not be applicable in cases where the shares / debentures / securities are sold by overseas corporate bedies owned directly or indirectly by non-residents of Indian nationality / Origin (NRIs) to the extent of at least 60 per cent, as also where such assets sold by NRIs on repatriation basis were held for a period upto 36 months [12 months in case of shares of a company or listed securities or units of UTI or a notified mutual fund]. In such cases the instructions contained in paragraph 3 of A.D. (M.A. Series) Circular No. 27 of 1982 will apply.
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