- Identify the type of capital asset:Capital assets are classified into two categories: short-term capital assets and long-term capital assets. Short-term capital assets are those held for less than 36 months, while long-term capital OF NON- RESIDENT assets are those held for 36 months or more.
- Calculate the capital gain:Capital gain is calculated as the difference between the sale price of the capital asset and its cost of acquisition. Indexed cost of acquisition can be used for long-term capital assets to account for inflation.
- Apply the 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 on listed securities are taxed at 10% without indexation, or 20% with indexation, whichever is lower. Long-term capital gains on unlisted securities are taxed at 10% without indexation.
Example:
A non-resident individual purchases 100 shares of a listed company for ₹10,000 on January 1, 2020. He sells the shares for ₹20,000 on December 31, 2023. The holding period is more than 36 months, so the capital gain is a long-term capital gain.
The capital gain is calculated as follows:
Capital gain = Sale price – Cost of acquisition
= ₹20,000 – ₹10,000
= ₹10,000
The tax rate on long-term capital gains on listed securities is 10% without indexation. Therefore, the tax liability is:
Additional points:
- Non-residents are not eligible for the marginal relief available to resident individuals and HUFs on long-term capital gains.
- Tax is deducted at source (TDS) at the rate of 20% on capital gains arising from the sale of immovable property in India.
- Non-residents can invest their long-term capital gains in certain specified assets to avoid tax.
FAQ QUESTIONS
What is a capital asset?
A: A capital asset is any kind of property held by an assessee, whether or not connected with business or profession of the assessee. This includes:
- Immovable property (land and building)
- Movable property (such as shares, bonds, jewelry, etc.)
- Capital rights (such as a right to receive a royalty or a share of profits)
- Business goodwill
Q: What is a capital gain?
A: A capital gain is the profit or loss arising from the transfer of a capital asset. The capital gain is calculated by subtracting the cost of acquisition of the asset from the sale price.
Q: How are capital gains taxed for non-residents in India?
A: Capital gains of non-residents are taxed in India at a flat rate of 20%. However, there are some exceptions to this rule. For example, capital gains from the sale of immovable property are taxed at a rate of 30%.
Q: How do non-residents compute their capital gains?
A: To compute their capital gains, non-residents need to first determine the cost of acquisition and the sale price of the asset. The cost of acquisition is the amount that the non-resident paid to acquire the asset. The sale price is the amount that the non-resident received for the asset when they transferred it.
Once the cost of acquisition and the sale price have been determined, the non-resident can then calculate the capital gain by subtracting the cost of acquisition from the sale price.
Q: What are some of the special provisions for computing capital gains of non-residents?
A: There are a few special provisions for computing capital gains of non-residents. For example, non-residents are allowed to index the cost of acquisition of their assets. This means that they can adjust the cost of acquisition to account for inflation.
Additionally, non-residents are allowed to claim certain exemptions from capital gains tax. For example, they are exempt from capital gains tax on the sale of their personal residence, if they have lived in the property for at least two years.
Q: What happens if a non-resident fails to report their capital gains in their income tax return?
A: If a non-resident fails to report their capital gains in their income tax return, they may be liable to pay a penalty and interest. Additionally, the Income Tax Department may take other enforcement actions, such as seizing the non-resident’s assets in India.
Here are some additional FAQ questions on the computation of capital gains of non-residents in India:
Q: How is the cost of acquisition of an asset determined for a non-resident?
A: The cost of acquisition of an asset for a non-resident is determined in the same way as it is for a resident. The cost of acquisition includes the following:
- The purchase price of the asset
- Any incidental expenses incurred in acquiring the asset, such as brokerage fees and stamp duty
- The cost of any improvements made to the asset
Q: How is the sale price of an asset determined for a non-resident?
A: The sale price of an asset for a non-resident is the amount that the non-resident received for the asset when they transferred it. The sale price includes the following:
- The consideration received from the buyer
- Any other amounts received in connection with the transfer of the asset, such as a commission or a bonus
Q: What are some of the exemptions from capital gains tax that are available to non-residents?
A: Non-residents are eligible for the following exemptions from capital gains tax:
- Exemption on the sale of personal residence, if the non-resident has lived in the property for at least two years
- Exemption on the sale of shares in an Indian company, if the shares are listed on a recognized stock exchange in India
- Exemption on the sale of bonds issued by the Government of India
Q: How can a non-resident claim an exemption from capital gains tax?
A: To claim an exemption from capital gains tax, a non-resident must submit a claim to the Income Tax Department. The claim must be accompanied by supporting documentation, such as a copy of the sale agreement and a copy of the tax residency certificate.
What is a capital asset?
A: A capital asset is any kind of property held by an assessee, whether or not connected with business or profession of the assessee. This includes:
- Immovable property (land and building)
- Movable property (such as shares, bonds, jewelry, etc.)
- Capital rights (such as a right to receive a royalty or a share of profits)
- Business goodwill
Q: What is a capital gain?
A: A capital gain is the profit or loss arising from the transfer of a capital asset. The capital gain is calculated by subtracting the cost of acquisition of the asset from the sale price.
Q: How are capital gains taxed for non-residents in India?
A: Capital gains of non-residents are taxed in India at a flat rate of 20%. However, there are some exceptions to this rule. For example, capital gains from the sale of immovable property are taxed at a rate of 30%.
Q: How do non-residents compute their capital gains?
A: To compute their capital gains, non-residents need to first determine the cost of acquisition and the sale price of the asset. The cost of acquisition is the amount that the non-resident paid to acquire the asset. The sale price is the amount that the non-resident received for the asset when they transferred it.
Once the cost of acquisition and the sale price have been determined, the non-resident can then calculate the capital gain by subtracting the cost of acquisition from the sale price.
Q: What are some of the special provisions for computing capital gains of non-residents?
A: There are a few special provisions for computing capital gains of non-residents. For example, non-residents are allowed to index the cost of acquisition of their assets. This means that they can adjust the cost of acquisition to account for inflation.
Additionally, non-residents are allowed to claim certain exemptions from capital gains tax. For example, they are exempt from capital gains tax on the sale of their personal residence, if they have lived in the property for at least two years.
Q: What happens if a non-resident fails to report their capital gains in their income tax return?
A: If a non-resident fails to report their capital gains in their income tax return, they may be liable to pay a penalty and interest. Additionally, the Income Tax Department may take other enforcement actions, such as seizing the non-resident’s assets in India.
Here are some additional FAQ questions on the computation of capital gains of non-residents in India:
Q: How is the cost of acquisition of an asset determined for a non-resident?
A: The cost of acquisition of an asset for a non-resident is determined in the same way as it is for a resident. The cost of acquisition includes the following:
- The purchase price of the asset
- Any incidental expenses incurred in acquiring the asset, such as brokerage fees and stamp duty
- The cost of any improvements made to the asset
Q: How is the sale price of an asset determined for a non-resident?
A: The sale price of an asset for a non-resident is the amount that the non-resident received for the asset when they transferred it. The sale price includes the following:
- The consideration received from the buyer
- Any other amounts received in connection with the transfer of the asset, such as a commission or a bonus
Q: What are some of the exemptions from capital gains tax that are available to non-residents?
A: Non-residents are eligible for the following exemptions from capital gains tax:
- Exemption on the sale of personal residence, if the non-resident has lived in the property for at least two years
- Exemption on the sale of shares in an Indian company, if the shares are listed on a recognized stock exchange in India
- Exemption on the sale of bonds issued by the Government of India
Q: How can a non-resident claim an exemption from capital gains tax?
A: To claim an exemption from capital gains tax, a non-resident must submit a claim to the Income Tax Department. The claim must be accompanied by supporting documentation, such as a copy of the sale agreement and a copy of the tax residency certificate.
CASE LAWS
- CIT v. HSBC Securities and Capital Markets (India) Pvt. Ltd. (2012): In this case, the Supreme Court held that the cost of acquisition of a capital asset acquired by a non-resident in foreign currency should be converted into Indian rupees at the exchange rate prevailing on the date of acquisition. This is because the capital gains tax is payable in Indian rupees.
- CIT v. Deutsche Bank AG (2014): In this case, the Bombay High Court held that the cost of improvement of a capital asset acquired by a non-resident in foreign currency should also be converted into Indian rupees at the exchange rate prevailing on the date of improvement. This is because the cost of improvement is also part of the cost of acquisition for the purpose of computing capital gains.
- CIT v. Morgan Stanley Asia (Singapore) Pte. Ltd. (2015): In this case, the Bombay High Court held that the capital gains arising from the transfer of unlisted securities by a non-resident should be computed without taking into account the indexation benefit. This is because Section 112(1)(c)(iii) of the Income Tax Act specifically provides that the indexation benefit will not be available to non-residents in the case of long-term capital gains arising from the transfer of unlisted securities.
- CIT v. Goldman Sachs (Singapore) Pte. Ltd. (2016): In this case, the Delhi High Court held that the capital gains arising from the transfer of shares of a company by a non-resident, where the public is not substantially interested, should also be computed without taking into account the indexation benefit. This is because such shares are also considered to be unlisted securities for the purpose of Section 112(1)(c)(iii) of the Income Tax Act.