What would the tax consequences be on current investments if a resident became an NRI for tax purposes? How much time can an NRI keep these investments?
What tax consequences may arise if NRIs sell these investments? What would the taxability of dividends be if NRI kept holding shares?
The NRI is permitted to maintain investments in India for as long as desired. The NRI shall be responsible for paying capital gains tax on the transfer of such assets upon the sale of such shares or mutual funds. The tax rate on dividends would be 20% (plus any relevant surcharge and cess).
Special Provisions for Tax on the sale of Shares/Mutual Funds by NRI
The profit made from trading carried out in India is liable to capital gain tax when an NRI invests in the Indian stock market.
In India, there are two different categories of capital gains:
- Short Term Capital Gains
- Long-Term Capital Gains
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Short-Term Capital Gains on Sale of Shares
When shares or mutual funds are sold before the year from the date of purchase has passed, a gain known as a short-term capital gain results from the selling of the shares or mutual funds.
The gain is subject to a 15% tax rate.
Long-Term Capital Gains on Sale of Shares
When shares or mutual funds are transferred more than a year after the date of purchase and the Securities Transaction Tax has been paid on such transactions, the gain is considered a long-term capital gain.
The applicable tax rate is as follows.
Exempt Shares sold before March 31, 2018, 10% (without indexation*) Exempt Shares sold on or after April 1, 2018, 10%
The cost of the purchase is adjusted for inflation through indexation.
Buy Unlisted Shares.
Provisions to calculate Long-Term Capital Gain
The updated rules are effective as of 1.4.2018. As a result, from 1.2.2018 to 31.3.2018, any capital gains from the sale of shares or mutual funds are exempt.
Any long-term capital gain resulting from the sale of shares or mutual funds before 31.1.2018 shall also be excluded under the new provisions.
The capital gain from 31.1.2018 to 2.5.2018 will only be taxed if you buy shares or mutual funds on 1.4.2016 and sell shares or mutual funds on 2.5.2018.
Additional considerations about the determination of the sale and purchase prices of the shares/mutual funds must be made when determining the gain on the taxable portion.
There are essentially three instances of the same
- The Sale Price Exceeds the Fair Market Value as of January 31, 2018
- Sale Price is greater than the Actual Cost but less than the Fair Market Value as of 31.1.2018.
The Fair Market Value will be the Sale Price.
The law’s goal, in this case, is to prevent damages brought on by the change in provisions.
- The sale price was lower than the shares’ or funds’ actual cost at the time of purchase.
In this instance, the actual cost of the shares or mutual funds will be used to determine the purchase price.
The Sale Price will be the Actual Sale Price.
Note: The intention of the law here is to protect the assessee from genuine hardship and allow actual loss.
Buy Delisted Shares.
Special provisions for Shares/Mutual Funds purchased in Foreign Currency
The following provisions are applicable to determine capital gains when an NRI purchases shares or mutual funds in foreign currency.
(Provision applicable only for NRI who has purchased shares in foreign currency.) This clause was added to shield investors from paying taxes on rupee depreciation.
Special Provision for Capital Gain Calculation:
These special requirements would not apply if the shares or mutual funds were bought in INR but sold after the person became an NRI; instead, the standard provisions would apply.
The money used to purchase Shares or Mutual funds is used to calculate capital gains.
(i) At the time of transfer, convert the sale price from Indian rupees to foreign currencies at the average* exchange rate.
(ii) Apply an average* exchange rate from the day of the purchase to the purchase price in foreign currency.
(iii) Convert sales-related expenses paid in Indian rupees into foreign currency at the exchange rate in effect on the transfer date.
(iv) Use the formula Capital Gains = Sale Price – Purchase Price – Expenses Incurred to get the capital gain in foreign currency.
(v) Exchange the capital gain determined in step 5 for the Indian rupee at the going rate on the transfer date.
*The average exchange rate is the product of the buying and selling rates of exchange used by the State Bank of India for telegraphic transfers when buying or selling such currency.
Solution:
Step 1: Varun bought the shares or mutual funds in our scenario using foreign cash.
Step 2: The purchase amount must be converted into foreign currency using the average exchange rate in effect on the date of the transaction, which is Average Rate=(50+48)/2=49.
490,000 divided by 49 is $10,000.
Step 3: The sale price must be converted into foreign currency using the average exchange rate in effect on the date of the sale, which is Average Rate= (50+55)/2= 52.5 Conversion= 800,000/52.5= $15238.
Based on the average exchange rate in effect on the day of sale, we must convert the expense amount into foreign currency, as follows: Average Rate= (50+55)/2= 52.5 Conversion= 5250/52.5= $100
Step 5: Determine the capital gain
Sale price minus purchase price fewer transfer costs equals capital gain.
Gain = 15238 – 10000 – 100 = $5138.
Step 6: Exchange the capital gain into Indian rupees at the going rate on the transfer date.
Capital Gain = 5138*55 = 282,590 in rupees.
Step 7: Tax calculation.
Because the holding period was shorter than a year, it is a short-term capital gain and is subject to 15% taxation.
15% times 282,590 (capital gains tax) equals Rs. 42,388.
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TDS on sale of Shares/mutual funds by NRI
An NRI is liable for TDS under section 195 while trading in shares or mutual funds.
The TDS on payments made to NRIs is often subtracted from the total sale consideration. The TDS must only be subtracted from Capital Gains in the event of Shares and Mutual Fund transactions.
