The computation of capital gain in the case of a non-resident under Section 48 of the Income Tax Act, 1961 (the Act) is as follows:

Step 1: Determine the type of capital asset

Capital assets are classified into two categories: short-term capital assets and long-term capital assets. A short-term capital asset is an asset that is held for less than 24 months, while a long-term capital asset is an asset that is held for 24 months or more.

Step 2: Determine the full value of consideration

The full value of consideration is the amount that the non-resident receives or is entitled to receive on the transfer of the capital asset. This includes the sale price, as well as any other amount received in exchange for the asset, such as a commission or brokerage fee.

Step 3: Determine the cost of acquisition

The cost of acquisition is the amount that the non-resident paid to acquire the capital asset, plus any expenses incurred in acquiring the asset. For example, if the non-resident purchased a piece of land for Rs.100 lakh and paid a registration fee of Rs.5 lakhs, the cost of acquisition would be Rs.105 lakhs.

Step 4: Determine the indexed cost of acquisition

The indexed cost of acquisition is the cost of acquisition of a long-term capital asset, adjusted for inflation. The indexation factor is determined by the Central Government and is published annually.

Step 5: Compute the capital gain

The capital gain is the difference between the full value of consideration and the cost of acquisition, or the indexed cost of acquisition, whichever is lower.

Step 6: Determine the applicable tax rate

The tax rate on capital gains for non-residents depends on the type of capital asset and the holding period.

• Long-term capital gains from the transfer of listed equity shares, units of equity oriented funds, or units of business trusts are taxed at a rate of 10%.
• Long-term capital gains from the transfer of other capital assets are taxed at a rate of 20%.
• Short-term capital gains are taxed at a rate of 30%.

Example

Suppose a non-resident individual purchased a listed equity share for Rs.100 in 2020 and sold it for Rs.150 in 2023. The capital gain in this case would be Rs.50 (Rs.150 – Rs.100). Since the holding period is more than 24 months, the capital gain would be a long-term capital gain. The applicable tax rate on long-term capital gains from the transfer of listed equity shares is 10%. Therefore, the tax payable on the capital gain would be Rs.5 (Rs.50 x 10%).

Tax deduction at source

In the case of a non-resident, tax is deducted at source (TDS) at the time of transfer of the capital asset. The TDS rate is 20%, irrespective of the type of capital asset or the holding period. However, the non-resident can claim a refund of any excess TDS paid, when they file their income tax return in India.

EXAMPLES

Example 1:

A non-resident individual (NRI) purchased listed equity shares of an Indian company for Rs.100 per share on 1.1.2022. He sold the shares on 1.1.2023 for Rs.150 per share.

Computation of capital gain:

Full value of consideration: Rs.150 per share Cost of acquisition: Rs.100 per share Capital gain: Rs.50 per share

Taxability:

The capital gain is taxable as long-term capital gain (LTCG) since the shares were held for more than one year. The tax rate on LTCG for non-residents is 10% (plus surcharge and health and education cess).

Therefore, the tax payable on the LTCG is Rs.5 per share.

Example 2:

An NRI purchased an immovable property in India for Rs.1 crore on 1.1.2022. He sold the property on 1.1.2023 for Rs.1.5 crore.

Computation of capital gain:

Full value of consideration: Rs.1.5 crore Cost of acquisition: Rs.1 crore Capital gain: Rs.50 lakhs

Taxability:

The capital gain is taxable as long-term capital gain (LTCG) since the property was held for more than two years. The tax rate on LTCG from immovable property for non-residents is 20% (plus surcharge and health and education cess).

Therefore, the tax payable on the LTCG is Rs.10 lakhs.

Example 3:

An NRI purchased unlisted equity shares of an Indian company for Rs.100 per share on 1.1.2022. He sold the shares on 1.1.2023 for Rs.150 per share.

Computation of capital gain:

Full value of consideration: Rs.150 per share Cost of acquisition: Rs.100 per share Capital gain: Rs.50 per share

Taxability:

The capital gain is taxable as long-term capital gain (LTCG) since the shares were held for more than one year. The tax rate on LTCG from unlisted securities for non-residents is 10% (without any indexation benefit).

Therefore, the tax payable on the LTCG is Rs.5 per share.

CASE LAWS

CIT v. SSK International (2016)

In this case, the Income Tax Appellate Tribunal (ITAT) held that Section 112(1)(c)(iii) of the Income Tax Act, which provides for a special computation of capital gains in the case of non-residents arising from the transfer of unlisted shares and securities, overrides the first and second provisos to Section 48 under Income Tax Act. This means that non-residents cannot avail the benefit of computing their capital gains on the transfer of unlisted shares and securities of Indian companies by converting the cost of acquisition and sale consideration into the same foreign currency as was initially utilized in the purchase of the shares or securities.

DCIT v. Legatum Ventures India (2019)

The ITAT in this case upheld the decision in the SSK International case and reiterated that Section 112(1)(c)(iii) is a special provision that overrides the first and second provisos to Section 48.

CIT v. GE Capital International Services (India) (2022)

In this case, the Bombay High Court held that the first proviso to Section 48 is applicable for the computation of capital gains arising from the transfer of shares and securities of Indian companies by non-residents, even if the shares or securities are traded on a foreign stock exchange. The Court observed that the first proviso to Section 48 under Income Tax Act is a general provision that applies to all cases of transfer of shares and securities of Indian companies by non-residents, irrespective of whether the shares or securities are listed on a domestic or foreign stock exchange.

FAQ QUESTIONS

1. What are the steps involved in computing the capital gain of a non-resident in India under Income Tax Act?
2. The following steps are involved in computing the capital gain of a non-resident in India under Income Tax Act:
3. Identify the type of capital asset being transferred. The type of capital asset will determine the period of holding required for it to be classified as a long-term capital asset or a short-term capital asset.
4. Calculate the full value of consideration received or accruing as a result of the transfer of the capital asset. This includes any amount received in cash or kind, as well as any market value of any asset received in consideration for the transfer.
5. Deduct the following expenses from the full value of consideration to compute the net capital gain:
   • Expenditure incurred wholly and exclusively in connection with the transfer of the capital asset.
   • The cost of acquisition of the capital asset and the cost of any improvement thereto.

Note: In the case of a non-resident, the cost of acquisition, expenditure incurred in connection with the transfer, and the full value of consideration shall be converted into the same foreign currency as was initially utilized  in the purchase of the shares or debentures.

4. Classify the net capital gain as long-term capital gain or short-term capital gain. A capital asset is held for a period of more than two years is classified as a long-term capital asset, while a capital asset held for a period of less than two years is classified as a short-term capital asset.
5. What are the tax rates for long-term capital gain and short-term capital gain for non-residents under Income Tax Act?
6. The tax rates for long-term capital gain and short-term capital gain for non-residents are as follows under Income Tax Act:

Long-term capital gain

• On shares and debentures of Indian companies: 20%
• On other capital assets: 20%

Short-term capital gain

• On shares and debentures of Indian companies: 30%
• On other capital assets: 30%

1. Are there any exemptions from capital gains tax for non-residents under Income Tax Act?
2. Yes, there are a few exemptions from capital gains tax for non-residents. Some of the common exemptions include under Income Tax Act:

• Capital gains arising from the transfer of shares in a foreign company.
• Capital gains arising from the transfer of a capital asset situated outside India.
• Capital gains arising from the transfer of a capital asset under a treaty for the avoidance of double taxation.

1. How can non-residents file their income tax returns in India under Income Tax Act?
2. Non-residents can file their income tax returns in India electronically through the Income Tax Department’s e-filing portal. The due date for filing income tax returns for non-residents is 31st July of the financial year.

Additional notes:

• Non-residents are required to deduct tax at source (TDS) at the rate of 20% on the full value of consideration received or accruing as a result of the transfer of a capital asset, subject to certain exemptions.
• Non-residents are also required to pay advance tax on their estimated capital gains tax liability.
• If a non-resident fails to deduct TDS or pay advance tax, they may be liable to pay interest and penalty.