Non-resident Taxation On Capital Gains

A Non-resident is an individual who has stayed outside India for more than 182 days in the previous financial year or more than 365 days in the last 4 financial years. They are important in determining the eligibility for government taxes, benefits, jury duty, education, voting, and other functions. If you stay less than 60 days in the Current year, you will also be considered a non-resident.

Who is a “Resident but Not Ordinary Resident (RNOR)”?

In India, RNOR is a special classification under the Income Tax Act. It applies to individuals and HUFs who meet the following conditions.

Condition 1:

An individual shall be considered as “not ordinary resident”,

• If he or she spends 730 days or more in India in the seven years preceding the current year.

• If he/she has resided in India for at least two of the ten prior fiscal years before the current year

Condition 2:

If they are an Indian citizen or a person of Indian origin with a total income of Rs. 15 lakhs (excluding foreign income) and stayed in India for 120 to 182 days during the previous year.

Condition 3:

If they are deemed to be a resident in India under the general residency rules (Section 6 of the Income Tax Act, 1961), they will be considered RNOR.

Other categories:

• Income Earned in India:

Non-residents are taxed only on the income earned or received in India, including salary/professional income, rental income from Indian properties, and Income from investments (dividends, interest) in Indian financial institutions.

• Global Income:

A Non–resident’s global income (income earned outside India) is not taxed in India unless they qualify as residents under Indian tax laws. If a Non-resident becomes a resident individual, their worldwide income is also subject to tax in India.

TDS on Non-resident Transactions

The buyer must obtain the TAN (Tax Deduction and Collection Account Number), deduct TDS at the applicable rate on payments to the non-resident seller, and deposit the deducted amount with the Income Tax Department.

• The Buyer must file Form 27Q in the next quarter and provide Form 16A to the seller.

• The Seller may apply for a lower withholding certificate using Form 13 for reduced TDS rates.

Tax Implications on Long-Term Capital Gains (Effective from 23rd July 2024)

1. Uniform Long-Term Capital Gain Tax Rates:

• To standardize the Long-Term Capital Gains (LTCG) tax rate for non-residents, a provision was reformed in the budget 2024.

• Under this provision, a uniform tax of 12.5% will be applied across all long-term capital assets including stocks, mutual funds, real estate, and other investments.

2. Simplified Holding Period:

Starting from FY 2024-25, the holding period for determining whether an asset is short-term or long-term has been streamlined.

• Listed Securities: Assets held for more than 12 months as longterm.

• Other Assets: Assets held for more than 24 months as longterm.

3. Exemption limit for LTCG:

The Exemption limit on the sale of equity shares or units has been raised from Rs 1 lakh to 1.25 lakhs.

Scenario:

1. Akash bought a house in 2005 for Rs. 20,00,000. He sold it in June 2024 for Rs. 65,00,000. The Cost Inflation Index (CII) for 2005-06 is 117 and for 2024-25 is 363. Calculate the taxable capital gain assuming the Indexation benefit of the sale is made before 23rd July 2024.

Solution:

Sale Consideration (A) = Rs. 65,00,000

Indexed cost of acquisition (B) = Original Cost × CII for the year of purchase/CII for the year of sale

= 20,00,000 × 363/117

= Rs. 62,05,128

Long-term Capital Gains (A-B) = 65,00,000 - 62,05,128 = Rs. 2,94,872

Tax on Long Term Capital Gains = LTCG × 20% = Rs. 58,974.4

Conclusion:

Akash would have to pay Rs. 58,974.4 as a tax on his long-term capital gains. The tax rate of 20% on long-term capital gains with indexation was applied in the calculation.

2. Ajith sold his equity shares and also held for more than 12 months, earning a profit of Rs. 3 lakhs. Calculate Capital Gains Tax

Solution:

Total LTCG = Rs 3,00,000

Exemption Limit = Rs 1,25,000

Taxable LTCG = Rs 1,75,000 (3,00,000-1,25,000)

LTCG Tax before amendment (10% on Rs 1,75,000) = Rs 17,500

LTCG Tax after amendment (12.5% on Rs 1,75,000) = Rs 21,875

Conclusion:

Despite the higher exemption limit (Rs 1.25 lakh), the increase in the tax rate from 10% to 12.5% led to a higher tax and cash flow.

3. Dheena sells equity shares held for more than 12 months, earning a profit of Rs 1 lakh. Calculate Capital Gains Tax.

Solution:

Dheena’s profit falls within the new exemption limit of Rs 1.25 lakhs so there is no LTCG tax applied to this transaction. This result leads to full tax exemption for Dheena.

Tax Savings on Capital Gains (For Non-residents)

1. Section 54

• The Non-residents can claim the capital gains exemption by selling a residential property in India and reinvesting the gains in another residential property in India within 1 year before or 2 years after the sale, or 3 years for construction.

• This exemption is proportional to the reinvested amount, and the property sold must be a long-term capital asset.

• Non-residents are eligible for the same benefits under Section 54 as residents, as long as the reinvestment is in India.

• If the taxpayer has more than one residential property at the time of sale, they will not be eligible for this exemption.

2. Section 54EC

• Under this section, Non-residents can claim a capital gains exemption by investing the gains from the sale of a long-term asset (property) in specified bonds (e.g., NHAI/REC bonds).

• The investment must be made within 6 months of the sale, with an exemption limit of ₹50 lakh (maximum).

• The bonds must be held for 5 years (minimum).

3. Section 54F

• They can claim the capital gains exemption if they sell any longterm assets (other than residential property) and reinvest the net sale in a new residential property in India.

• The Property must be purchased 1 year before or 2 years after the sale, or constructed within 3 years.

4. Section 54B

• Section 54B allows non-residents to claim the capital gains exemption if they sell agricultural land in India and reinvest the gains in purchasing new agricultural land in India within 2 years of the sale.

• To qualify for the exemption, the original land must be held for over 2 years.

Note: The Section 54 is available only for residential property. If it is a commercial one, the exemption will not be applicable.

Double Taxation Avoidance Agreement (DTAA)

The Double Taxation Avoidance Agreement is a treaty signed between two or more countries to avoid taxing the same income twice. It provides tax benefits and relief for non-residents to avoid the income taxed twice in India and other countries.

• Non-residents can claim benefits under the Double Taxation Avoidance Agreement for capital gains.

• DTAA may provide reduced tax rates or allow taxation only in the Non-resident’s country of residence up on the agreement.

• Additionally, DTAAs may offer tax credits for non-residents in India to avoid double taxation and reduce the tax burden on capital gains.

Tax Implications on Short-Term Capital Gains

Starting July 23, 2024, the Short-Term Capital Gains (STCG) tax rate for non-residents investing in stocks, equity mutual funds, and business trusts increased from 15% to 20%.

This tax rate applies to capital gains that are taxable under the following sections of the Income Tax Act:

• Section 111A: Applies to short-term capital gains from the sale of listed equity shares and securities.

• Section 112A: Deals with short-term capital gains on the sale of equity shares or units of equity mutual funds.

Scenario:

1. Kailash invests Rs 1,00,000 in an equity mutual fund and sells the units when the fund’s value rises to Rs 1,50,000.

Solution:

Sale Consideration (A) = Rs 1,50,000

(Total Sales) Investment in Mutual Fund (B) = Rs 1,00,000

Short-Term Capital Gains (A - B) = Rs 1,50,000 - 1,00,000 = Rs 50,000

STCG Tax at 15% (Before Amendment): Kailash’s tax on these gains would be Rs 7,500 (15% of Rs 50,000).

STCG Tax at 20% (After Amendment): Tax liability has been increased to Rs 10,000 (20% of Rs 50,000).

Conclusion:

After the amendments, Kailash's tax outflow on shortterm capital gains increased from Rs 7,500 to Rs 10,000, causing a larger tax burden.