The taxation of capital gains arising from the sale of foreign securities and assets for non-residents is governed by various provisions of the Income Tax Act, 1961, as well as international tax agreements, including Double Taxation Avoidance Agreements (DTAA). These provisions help determine the scope of tax liability for non-residents on their capital gains and whether any exemptions or reductions apply.
In this blog, we will explore how capital gains tax applies to foreign securities and assets for non-residents, the tax rates, and the role of DTAA in providing exemptions or relief to reduce double taxation.
Capital Gains Tax for Non-Residents on Sale of Foreign Securities and Assets
When a non-resident sells foreign securities or assets, the capital gains derived from such transactions are generally subject to taxation in India if the non-resident has India-sourced income or investment in India. However, capital gains tax on the sale of foreign securities is more often governed by DTAA between India and the country of residence of the non-resident.
1. Capital Gains Tax on Sale of Foreign Securities
For non-residents, the taxation of capital gains on the sale of foreign securities depends on whether the securities are classified as short-term or long-term:
- Short-Term Capital Gains (STCG): If the securities are sold within 36 months of purchase, the capital gain is considered short-term, and the tax rate is generally 15%.
- Long-Term Capital Gains (LTCG): If the securities are held for more than 36 months, the capital gain is considered long-term, and the tax rate is generally 10% (without indexation) or 20% (with indexation) for securities such as equity shares and mutual fund units.
However, the taxation rules can vary depending on the type of foreign asset and the applicable DTAA provisions. Non-residents can benefit from preferential tax treatment or exemptions under the DTAA based on their country of residence.
2. Capital Gains Tax on Sale of Foreign Assets
When non-residents sell foreign assets such as property or business assets, the capital gains tax treatment depends on whether the gain is short-term or long-term, and the duration for which the asset was held.
- Short-Term Capital Gains (STCG): If the asset is sold within three years (or the applicable period as per DTAA), it is subject to short-term capital gains tax.
- Long-Term Capital Gains (LTCG): If the asset is held for more than three years, long-term capital gains are subject to tax at a rate of 20% with indexation.
In the case of real estate or immovable property located outside India, capital gains are often subject to tax in the country where the property is located. However, DTAA can provide a mechanism for avoiding double taxation.
How Does DTAA Impact the Taxation of Capital Gains for Non-Residents?
The Double Taxation Avoidance Agreements (DTAA) are treaties between India and other countries aimed at preventing double taxation of income. When capital gains are subject to taxation in both the country of residence and India, DTAA provisions can help reduce or eliminate this double taxation. These agreements specify which country has the taxing rights over various types of income, including capital gains.
1. Exemption or Reduced Tax Rates under DTAA
Under a DTAA, if a non-resident sells foreign securities or assets, the tax treatment is generally determined by the following provisions:
- Tax Residency: The country in which the non-resident is a tax resident may have exclusive taxing rights over the capital gain, or the capital gains tax may be split between the two countries.
- Exemption or Tax Reduction: Many DTAAs provide for an exemption or a reduced tax rate for certain types of capital gains. For example, capital gains on the sale of shares may be taxed only in the non-resident’s country of residence, or at a reduced rate in India under the DTAA.
- Credit for Foreign Taxes Paid: If capital gains tax is paid in the country of the non-resident’s residence, the DTAA may allow the taxpayer to claim a tax credit in India for the taxes paid in the foreign country, thus preventing double taxation.
2. Specific Examples of DTAA Provisions
- India-United States DTAA: According to the India-US DTAA, capital gains on the sale of shares or securities are taxable only in the country of residence of the seller, i.e., if the non-resident is a resident of the US, they are not subject to capital gains tax in India on the sale of shares listed on the Indian stock exchange.
- India-Singapore DTAA: Under the India-Singapore DTAA, there is a tax exemption on capital gains arising from the sale of shares in Indian companies if the shares were held for more than 12 months. This has been a significant benefit for investors in the Singapore jurisdiction.
How Are Capital Gains Computed Under DTAA?
The computation of capital gains under the DTAA involves the following steps:
- Sale Price: The amount received from the sale of foreign securities or assets.
- Cost of Acquisition: The cost at which the foreign securities or assets were acquired. In the case of long-term assets, the cost can be adjusted for inflation using the indexation benefit.
- Capital Gain: The capital gain is the difference between the sale price and cost of acquisition.
Example of Capital Gains Computation under DTAA:
Let’s assume a non-resident sells foreign securities held for more than 36 months.
| Details | Amount (₹) |
|---|---|
| Sale Price of Foreign Securities | ₹1,00,00,000 |
| Cost of Acquisition (Indexed) | ₹40,00,000 |
| Capital Gain | ₹60,00,000 (Sale Price – Cost of Acquisition) |
| Tax Rate Under DTAA (India-Singapore) | Exempt or Reduced Rate (10%) |
| Tax Payable in India | ₹6,00,000 (10% of ₹60,00,000) |
In this case, under the India-Singapore DTAA, the capital gain of ₹60,00,000 is subject to 10% tax, and the tax payable in India would be ₹6,00,000.
Key Considerations for Non-Residents
- Tax Residency: The country of residence of the non-resident plays a significant role in determining the taxability of capital gains. Understanding the provisions of DTAA between India and the country of residence is crucial for tax planning.
- Reinvestment in India: Non-residents may be eligible for certain exemptions if the capital gains are reinvested in specific assets, such as residential properties, under sections like Section 54 or Section 54EC.
- Filing of Returns: Non-residents must ensure proper filing of their income tax returns in India, declaring their capital gains, and claiming any applicable exemptions or tax credits under DTAA.
- Tax Compliance: Non-residents should consult with a tax advisor to ensure compliance with the provisions of DTAA and to avoid penalties for non-reporting of foreign income.
Conclusion
For non-residents, the capital gains tax on the sale of foreign securities and assets depends on the holding period, the nature of the asset, and the provisions of the relevant Double Taxation Avoidance Agreement (DTAA). STCG and LTCG are taxed at different rates, and the DTAA may provide exemptions or reduced tax rates, preventing double taxation of capital gains.
By understanding the applicable tax rules, non-residents can optimize their tax liabilities on the sale of foreign securities and assets. Consulting with a tax professional and exploring the provisions of DTAA is essential for effective tax planning.
Additional Resources
Learn more about Tax Provisions on the official Income Tax India website.
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