If bought for investment, bitcoin may be treated as capital asset
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I was an NRI living in Singapore and I returned in August 2017. I have bitcoins worth Rs3.2 lakh that I had bought in Singapore. I am planning to sell these. What will be my tax liability? I had bought the bitcoins (initial value Rs35,000) in September 2016. What will be my tax liability? How should I file it?
Taxability in India depends on the following factors:
(a) Source of income, and
(b) Residential status as per Income-tax Act,1961.
Typically, source of income lies where the services are performed, or where the asset from which the income arises is located. There is no clarity on situs of bitcoin for tax purposes. Residential status under the income-tax law is determined based on your physical presence in India in the current financial year (FY) (1st April to 31st March) and preceding 10 FYs.
Depending on the number of days of presence in India, there can be following types of residential status in India:
(a) Resident and Ordinarily Resident (ROR)
(b) Resident but Not Ordinarily Resident (RNOR)
(c) Non Resident (NR)
An individual qualifying as ROR is taxable on global income. An individual qualifying as RNOR is taxable on income sourced from or received in India and income which is derived from a business controlled in or a profession set up in India. An individual qualifying as NR is taxable only on income sourced from or received in India.
Income from sale of bitcoins earned outside India and received outside India will not be taxable in India if you qualify as NR or an RNOR in India. Subsequent remittance of the said income will also not be taxable in India. But since the issue of situs of bitcoins is not a settled concept, there can be possible litigation with the tax authorities on this issue. In case you qualify as an ROR, the income from sale of bitcoins would be taxable in India.
In the absence of specific guidelines by the income tax authorities in India, bitcoins may be treated as a capital asset if they are purchased for the purpose of investment. If they are accepted as capital assets, any gains arising on sale will be considered income under the head capital gains. Gain or loss on sale of bitcoins will be calculated first on each bitcoin transaction, then on an aggregate basis by combining all gains and losses to produce a net figure. Gain or loss will be computed by taking the sale price of each bitcoin and subtracting its cost.
Bitcoins held for not more than 36 months will be considered short-term capital assets (STCG), and would be taxable at your applicable slab rates plus surcharge and education cess. Long-term capital gain (LTCG) is taxed at 20% plus applicable surcharge and education cess, with the benefit of indexation.
In case of double taxation, applicable benefit may be explored as per the provisions of Double Taxation Avoidance Agreement between India and Singapore. We recommend that you check your residential status in India to determine the taxability and income-tax return filing requirement. Also, since legal status and taxation of bitcoins in India has not fully evolved, it is advisable to obtain professional advice before filing your tax return.
Could you clarify if the amount lying in an NRO account can be used for making loans to a third party? Can I utilise such money for the investments in shares of Indian private limited companies? Are there any restrictions on how the money in such accounts can be used?
—Name withheld on request
Under the exchange control regulation, NRI/PIO can advance a loan from balance standing in his/her NRO account to:
a. person resident in India (not being a company); or
B. Indian company.
When lending to a resident Indian, following conditions should be satisfied:
a) The loan should be on non-repatriation basis;
b) The loan amount should be debited to NRO account of the lender ;
c) Period of loan should not exceed 3 years;
d) The rate of interest on the loan cannot be more than 2% above the prevailing bank rate;
e) Repayment (principal and interest) by the borrower should be made only to the NRO account of the lender.
When lending to an Indian company, following conditions should be satisfied:
a) The Indian company should not carry out agricultural/plantation/real estate business or trade in transferable development rights or act as Nidhi or chit fund company;
b) The borrowing is by issuance of non-convertible debentures (NCDs);
c) The issue of NCD’s is made by public offer;
d) The rate of interest should not be more than 3% of the applicable prime lending rate of State Bank of India;
e) Period of loan should not be less than 3 years;
f) The borrowing should be on non-repatriation basis and the loan amount should be debited to NRO account of the investor (maintained with an authorised dealer/an authorised bank in India);
g) Repayment (i.e. principal and interest) should be made only to the NRO account of the lender.
There are general restriction on usage of borrowed funds for carrying out agricultural/plantation/real estate business or trade in transferable development rights or act as Nidhi or Chit fund company. Further, these funds can only be used by the borrower for his own business (other than mentioned in Point B a) above and construction of farm houses) and not for investment/re-lending purposes.
Further, under the exchange control regulations, NRI/PIO is eligible to purchase shares issued by Indian company on non-repatriation basis from the funds held in his NRO account maintained with the Authorised Dealer category-1 Bank.
Also, NRO accounts may be used for following purposes:
a) All local payments including payments for investments subject to regulations laid down by Reserve Bank of India;
b) Remittance outside India of current income earned in India of the account holder after deduction of applicable taxes;
c) Transfers to other NRO accounts;
d) Settlement of charges on international credit cards issued by authorised dealer banks in India to NRIs/PIOs subject to the limits prescribed for repatriation of balances held in NRO accounts.
e) Remittance up to USD 1 million per financial year.
Accordingly, NRI/PIO may advance a loan to person resident in India (other than company) and to Indian company and also, purchase shares of an Indian company from his/her NRO account subject to fulfilment of above mentioned conditions. However, these regulations are updated from time to time, you may contact your banker for the same.
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Sonu Iyer is tax partner and people advisory services leader, EY India