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Explained: Capital gains and taxation for NRIs

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When it comes to a non-resident Indian (“NRI”) there is an altogether different mechanism of taxability.

Explained: Capital gains and taxation for NRIs
In India taxability of income is determined based on the residential status of an individual. For an Indian resident, income earned in India, as well as globally, is taxable.
The only point of consideration is at what rate different incomes such as income from house property, capital gain, etc. are to be taxed.
However, when it comes to a non-resident Indian (“NRI”) there is an altogether different mechanism of taxability. Each income needs to be evaluated based on various parameters to ascertain whether the same is taxable in India or not. Generally, income earned or source of which is in India is taxable in India. However, there are certain provisions that tax any income from any source whether within or outside India, if such income is received in India. One can always restore to treaty benefits to determine the best suitable taxability of any given income.
Generally, a person satisfying any of the following conditions becomes a resident in India:
a. If a person is in India for 182 days or more in the current year, or
b. If a person is in India for more than 365 days in the last 4 preceding years and is in India for a period of 60 days or more in the current year.
If a person does not satisfy any of these conditions, he/she is considered as Non-Resident in India as per the prevailing tax provisions and therefore only his/her Indian income becomes taxable in India and not their global income.
However, Finance Act, 2020 (applicable from AY 2021-22), has inserted the new deeming provisions for residency, wherein a person shall be deemed to be resident in India;
i. In case of an Indian citizen/Person of Indian Origin (PIO) - if his/her stay during the year is 120 days or more (instead of 182 days) and his total income other than income from foreign sources exceeds Rs. 15,00,000/- during the year;
ii. In case of an Indian Citizen - if his/her total income other than income from foreign sources exceeds Rs. 15,00,000/- and if he/she is not liable to tax in any other country or territory by reason of his domicile or residence or any other specific criteria (i.e. without even staying for single day in India).
Therefore, a person along with monitoring the number of days present in India, he/she is now also required to keep a tab of his Indian taxable Income while determining their residential status.
Broadly, a Capital asset is defined to mean any property of any kind held by the person, any securities held by Foreign Institutional Investors, Unit Linked Insurance Plan (to which exemption u/s 10(10D) does not apply), but excludes, any stock in trade, consumable stores or raw materials held for purposes of business and personal movable assets (excluding: jewellery, archaeological collection, drawings, paintings, sculptures and any other work of art).
Capital gains has a peculiar mechanism of taxation in case of residents as well as NRIs. Some important aspects relevant to NRIs with respect to capital gains are as below:
1. For levying tax on capital gains, one has to determine whether the gain is long-term (LTCG) or short-term (STCG)?
The capital asset is to be classified as a short-term/ long-term capital asset based on the period of holding as follows;
i. In case of listed shares, units of equity-oriented fund/units of UTI, zero coupon bond if the period of holding is less than or equal to 12 months, then the gain arising on such transfers is STCG, in other cases it is LTCG (i.e., holding > 12 months)
ii. In case of unlisted shares, land or building both, the below mentioned assets, if the period of holding is less than or equal to 24 months, then the gain arising on such transfer is STCG, in other case it is LTCG (i.e., holding > 24 months)
iii. In case of Unit of debt-oriented fund, Unlisted securities other than shares, other capital assets, if the period of holding is less than or equal to 36 months, then the gain arising on such transfer is STCG, in other case it is LTCG (i.e., holding > 36 months).
2. Tax rates on LTCG/STCG:
STCG is taxable at a concessional rate of 15% on transfer of certain capital assets and with respect to LTCG, NRIs can take benefit of exemption up to 1 lakh on Indian equities and beyond that the gains will be taxable @ 10% without any indexation benefit.
3. Tax on capital gains earned by non-residents: a few considerations;
● NRIs are subject to TDS at the applicable rates on capital gains earned irrespective of any threshold value;
● NRIs do not have benefit of adjusting their capital gains against the basic exemption limit;
● NRIs are allowed to claim capital gains exemption by making certain investments as per provisions of section 54 to 54GB of the Act.
● No claim of deduction under Chapter VI-A is available against the income from investment and capital gains;
● If transfer is made outside India by one NRI to another NRI, the same shall not be treated as transfer for calculating capital gains;
● Capital gains arising out of sale of Global Depository receipts, Rupee denominated bonds, Government security with periodic payment of Interest and other specified capital assets by Non-residents outside India are not eligible for income-tax in India since the same are not regarded as transfer.
● The Capital gains are to be calculated in foreign currency using Telegraphic transfer buying (‘TTBR’) and Telegraphic transfer selling rate (‘TTSR’) as per the applicable rules and the same should be converted to Indian currency using the rate prevailing on that date.
It is worth noting here that, in order to reduce the compliance burden, the Indian Government has provided a benefit of not filing tax returns by the NRI if, during the year, he/she only has income from investments and TDS has been deducted on that. However, it is possible that the total TDS deducted exceeds the NRI's tax liability, in which case the NRI must file a return to claim the excess TDS deducted.
If any of these conditions are not taken care of while filing the return of income and the case is assessed by the income-tax officials, NRIs may have to face the penalty consequences as per the income-tax provisions.
The author, Sneha Padhiar, is Partner at Bhuta Shah & Co. The views expressed are personal
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