The taxation of capital gains arising from the sale of shares and securities by non-residents is governed by specific provisions under the Income Tax Act, 1961. Section 115E plays a key role in determining the tax treatment of capital gains on the sale of shares and securities by non-residents. This section provides a special tax regime for non-resident individuals, foreign companies, and entities based outside India, offering them certain exemptions and reduced tax rates for capital gains.
In this blog, we will explore Section 115E and related sections, how they impact the taxation of capital gains from the sale of shares and securities by non-residents, and the key exemptions or benefits available under these provisions.
What is Section 115E?
Section 115E of the Income Tax Act, 1961 deals with the taxation of capital gains earned by non-resident individuals and foreign companies from the sale of shares and securities. This section provides for a special tax rate for non-residents, which is generally lower than the standard tax rates applicable to residents.
Key Features of Section 115E:
- Tax Rate: Section 115E specifies a reduced tax rate for non-residents on long-term and short-term capital gains arising from the sale of shares and securities.
- Eligibility: The provisions under Section 115E apply to non-resident individuals or foreign companies who hold shares or securities.
- Scope: The section applies to both listed and unlisted securities and shares.
Taxation of Capital Gains for Non-Residents Under Section 115E
The tax treatment of capital gains from the sale of shares and securities by non-residents is divided into two categories: short-term capital gains (STCG) and long-term capital gains (LTCG). These categories are based on the holding period of the asset, which is defined under Section 2(42A) for capital assets.
Short-term capital gains arise when shares or securities are sold within 36 months from the date of acquisition. For listed securities, this period is 12 months.
- Tax Rate: For non-residents, short-term capital gains on the sale of listed securities are taxed at a rate of 15% (plus applicable surcharge and cess). For unlisted securities, short-term capital gains are taxed at the normal rate under the Income Tax Act.
- Example: If a non-resident sells shares of an Indian company within 12 months of purchase, the capital gain will be taxed at 15% if the shares are listed. The rate may vary depending on whether the security is listed or unlisted.
Long-term capital gains arise when shares or securities are held for more than 36 months for unlisted securities and 12 months for listed securities.
- Tax Rate: Long-term capital gains arising from the sale of listed shares are taxed at 10% (without indexation) if the gain exceeds ₹1 lakh in a financial year. This is applicable only to listed securities under Section 112A.For unlisted securities, the capital gains are taxed at 20% with the benefit of indexation (adjusting the cost of acquisition for inflation).
- Exemptions: Under certain circumstances, non-residents may avail of exemptions under Section 54 (for reinvestment in residential property) or Section 54EC (for reinvestment in specified bonds) to reduce their taxable capital gains.
Related Sections Impacting the Taxation of Capital Gains for Non-Residents
In addition to Section 115E, several other sections of the Income Tax Act impact the taxation of capital gains on the sale of shares and securities by non-residents:
1. Section 112A – Tax on Long-Term Capital Gains from Listed Securities
Section 112A is particularly relevant for non-residents selling listed shares or securities. It provides a 10% tax rate (above ₹1 lakh) on long-term capital gains arising from the sale of listed securities, without the benefit of indexation. This section ensures that non-residents are taxed at a lower rate compared to the regular tax rates applicable to residents.
2. Section 54F – Reinvestment of Capital Gains in Residential Property
Non-residents can also benefit from the exemption under Section 54F if they reinvest the capital gains from the sale of shares or securities in a new residential property. To avail of the exemption, the taxpayer must reinvest the entire capital gain in the new property within two years from the date of sale.
- Example: If a non-resident earns a capital gain of ₹50,00,000 from the sale of shares and reinvests the entire amount in a residential property, the capital gain may be fully exempt from tax.
3. Section 54EC – Reinvestment in Specified Bonds
Under Section 54EC, non-residents can claim an exemption from capital gains tax by reinvesting their capital gains in specified bonds, such as bonds issued by the National Highways Authority of India (NHAI) or the Rural Electrification Corporation (REC). These bonds must be held for five years, and the maximum exemption limit is ₹50,00,000.
4. Section 90 – Double Taxation Avoidance Agreement (DTAA)
For non-residents, Section 90 allows the provisions of the Double Taxation Avoidance Agreement (DTAA) between India and their country of residence to apply. If there is a DTAA between India and the non-resident’s country, the non-resident may be eligible for reduced tax rates or exemptions on capital gains as per the agreement.
- Example: If a non-resident individual from the US sells shares in an Indian company, and there is a DTAA between India and the US, the tax rate on capital gains may be reduced under the provisions of the agreement.
Tax Filing and Compliance for Non-Residents
Non-residents earning capital gains from the sale of shares and securities in India must file their income tax returns in India to report their gains and pay the applicable taxes. They are required to submit:
- Form ITR-2: For individuals, Hindu Undivided Families (HUFs), and others who do not have income from business or profession but have capital gains income.
- Tax Deducted at Source (TDS): Non-residents should also ensure that TDS (Tax Deducted at Source) is deducted at the applicable rates on their capital gains.
Conclusion
Section 115E and related provisions under the Income Tax Act provide a clear framework for taxing capital gains arising from the sale of shares and securities by non-residents. The taxation differs based on whether the gains are short-term or long-term, with special tax rates applied to each category. Additionally, exemptions under Section 54F and Section 54EC can help non-residents reduce their tax liability through reinvestment in residential properties or specified bonds.
Non-residents should be aware of the tax rates on both short-term and long-term capital gains, and they should also take advantage of any available exemptions to optimize their tax liabilities. Consulting with tax professionals familiar with international tax laws and DTAAs is highly recommended to ensure compliance and maximize tax efficiency.
Additional Resources
Learn more about Tax Provisions on the official Income Tax India website.
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