The Income-tax (I-T) Act, 1961 provides for taxation of income generated from the sale/ transfer of capital assets (i.e., capital gains), which include shares, securities, immovable property, jewellery, etc., while certain categories such as stock-in-trade, movable property, specified bonds, etc., do not qualify as capital assets.
Tax on capital gains is determined on the basis of the duration for which the assets are held. As a thumb rule, assets held for not more than 36 months are short-term assets. However, there are certain exceptions (see table above). Capital gain is calculated by deducting the cost of acquisition (COA) of the asset and the expenses incurred in its transfer from the sale consideration of the asset. In certain cases, the I-T Act also allows adjustments to the COA in line with the inflation/ exchange fluctuation.
The capital gains computed for non-residents are taxed at specified rates depending on the nature of asset (see the table above). In addition to the above, surcharge and health and education cess will be levied at applicable rates and the effective tax rate could be up to 42.74%. However, in the case of capital gains on the sale of listed shares, the surcharge is capped at 15%. In the Union budget 2022, it is proposed that the 15% surcharge cap will be extended to all long-term capital gains (LTCGs) from the financial year 2022-23 onwards.
The I-T Act also has special provisions on taxation of investment income and LTCGs earned by NRIs from investment in specified assets (shares, debentures, deposits in an Indian company, etc.) acquired in convertible foreign exchange. Further, individuals are required to pay advance tax on the capital gains earned by them only from the respective quarter in which the capital gains arise.
Non-residents should also look at taxation of capital gains under the double taxation avoidance agreements or tax treaties that India has entered with various countries. India’s tax treaty with the US and the UK requires capital gains to be taxed as per the domestic tax laws of respective countries, while treaties with Singapore and Mauritius have specific provisions regarding the right of taxation depending on the nature of the capital asset. In case of immovable property, the right of taxation is given to the country where the asset is situated.
Take note that treaty benefits are available only to individuals who are resident of at least one of the countries that are parties to the tax treaty. Also, some of these treaties have a provision that the individual will not be eligible to avail benefits if the individual has arranged his/her affairs with the main intent to avail treaty benefits. Considering the above, NRIs should carefully evaluate each sale transaction of their assets located in India to determine the taxability and maintain proper documentation to ensure appropriate tax compliance.
Amarpal S Chadha is partner and India Mobility Leader, People Advisory Services, EY.