Tax implications on capital gains earned by NRIs

The capital gains tax provisions for NRIs are similar to those for the resident individuals except for the applicability of TDS provisions. Like resident investors, the taxability of capital gains also depends on the holding period and the type of investments sold.

NRIs do not have the option of adjusting their capital gains against the basic exemption limit of Rs 2.5 lakh.

Taxability depends on the residential status of the individual. For instance, a resident taxpayer has to pay tax on his global income; however, a non-resident Indian (NRI) is liable to income tax only on the income earned from Indian sources.

NRIs can invest in equity stocks and mutual funds, provided they abide by the Foreign Exchange Management Act (FEMA) provisions.

The capital gains tax provisions for NRIs are similar to those for the resident individuals except for the applicability of TDS provisions. Like resident investors, the taxability of capital gains also depends on the holding period and the type of investments sold.

Types of investments and their tax implications;

Capital gain on equity and related instruments by NRI

For listed shares, units of equity-oriented funds or units of business trust and zero-coupon bonds, a holding period of more than 12 months is considered long term, whereas less than 12 months is regarded as short term. Gains on the sale of long-term assets would be considered long-term capital gain (LTCG), and gains arising from the sale of short-term assets will be regarded as short-term capital gains (STCG).

For NRIs, LTCG on equity and equity-oriented investments is taxable at 10 per cent exceeding Rs.1 lakh exemption. Securities transaction tax (STT) must have been paid to sell equity shares or equity-oriented units. Remember, no indexation benefit is allowed on the cost of acquisition for equity-oriented investments. The investors can increase the acquisition cost of the equity investments up to 31 January 2018 by using the grandfathering rule.

Short-term capital gains from equity and equity-oriented investments are taxable at a flat 15 per cent.

Capital gain on unlisted shares and immovable property by NRI

For unlisted shares and immovable properties, holding for more than 24 months is considered long term, and less than 24 months will be regarded as short term.

Long-term capital gain on unlisted shares and immovable property is taxable at 20 per cent with indexation. Indexation allows increasing the cost of assets by factoring in inflation.

Whereas short-term capital gain on these assets will be added to other taxable income and taxed as per individuals slab rate. For example, if an individual has a 20 per cent tax rate, then STCG will be taxable at 20 per cent.

Taxability of Debt-funds and other capital assets

For debt-oriented funds, unlisted securities other than shares and any other capital asset, a period of more than 36 months will be considered long term, which will be regarded as short term.

Long-term capital gains on debt-oriented investments or any other capital asset will be taxable at a rate of 20 per cent with indexation. Short-term capital gains are added to other taxable income and taxed as per individuals slab rate.

Education and higher education cess of 4 per cent will be added to both short term and long-term tax rates.

Tax exemptions available to NRIs:

Capital gain from the sale of long-term residential property can be claimed as an exemption by purchasing a new residential house in India under Section 54. Section 54 also allows a one-time option to invest in two houses against the sale of residential house property, provided the gain is not more than Rs.2 crore.

Whereas exemption from capital gains on the sale of any long-term capital asset other than the residential property can be claimed under Section 54F.

Under both these sections, NRI has to purchase another residential property within one year prior or two years after, or construction of new property within three years from the date of transfer of such long-term immovable property. Also, this exemption would be reversed if the new property is sold within three years of its purchase. Also, there are other restrictions and conditions for claiming exemptions that the taxpayers need to adhere to.

Under Section 54, only the capital gain needs to be reinvested to claim the exemption. However, under Section 54F, the entire sale receipt is required to be invested. Or else only proportionate exemption will be allowed.

NRI can also claim exemption from the capital gain tax by reinvesting the amount in specified bonds within six months from the date of transfer of such property (Section 54EC). However, under this section, a maximum exemption can be claimed by investing is Rs.50 lakh.

Suppose your LTCG remains uninvested till the ITR filing due date. In that case, taxpayers can deposit the amount in a capital gain account with the designated bank, which can be subsequently withdrawn for investment within a specific time. Remember to invest the exact amount you plan to take the exemption, as the remaining portion will be subject to LTCG.

Advance tax implications to NRI

NRIs are also liable to pay advance tax if the estimated tax liability exceeds Rs 10,000 in a financial year. Interest under Section 234B and Section 234C is applicable if you fail to pay advance tax.

Applicability of TDS provisions to NRI

NRIs are subject to TDS at the applicable rates on capital gains earned at the highest tax rates, irrespective of any threshold value. The rate of TDS is 10 per cent on the equity-related capital gains and 20 per cent post indexation for other than equity investments.

Short-term capital gains from equity-oriented investments are subject to a TDS of 15 per cent plus applicable cess. At the same time, non-equity oriented investments (such as debt funds) are subject to a TDS of 30 per cent.

Relief from double taxation

The Non-resident can take relief from using the DTAA (Double Taxation Avoidance Agreement) if India has a tax treaty signed with their residence country. Under the treaty, the non-residents can (i) Pay tax in any one country or (ii) Pay tax in both the countries and claim DTAA relief in the country of residence.

Also, NRIs do not have the option of adjusting their capital gains against the basic exemption limit of Rs 2.5 lakh.

As we all know, an individual is liable to pay tax only if the total taxable income is greater than the basic exemption limit. Also, in the case of residents, if LTCG or STCG is less than the basic exemption limit, such shortfall can be set off against the long term and short term gains. However, non-residents cannot set off this shortfall. So a non-resident has to pay total tax on the capital gains even if his income is below the basic exemption limit.

Also, it should be remembered that deduction under Chapter VI-A is not available from capital gains income.