LTCG re-invested in specified bonds or a house in India is exempt from tax
NRIs can avoid paying income tax if they invest the long-term capital gains from sale of certain financial securities and physical assets, into specified bonds or a house in India
I have been trading through my NRI portfolio investment scheme (PIS) account for the past 8 years. All the transactions are done by NRE funds only. As on 15 October, all the credits and debits were done through NRI PIS. On 18 October, I sold some of my old portfolio holdings, including some shares with splits, bonus, and differential voting right (DVR) allotments. Still, the bills are pending because I was told that all my holdings are in NRE non-repatriable demat account and can be processed only through NRO account. (I have opened an NRO PIS account also, which is not operational now.)
My holding statements mention NRE non-repatriable. The bank said that this issue was noticed when I sold shares with corporate actions. They also said that I cannot change the status of the demat account. They did not say whose mistake it is, the broker’s or the bank’s.
Can you please clarify if trading can be done through an NRO account and can income tax return (ITR) be filed if profit is more than Rs2.5 lakh per year?
Taxability of capital gains arising from sale of shares or mutual funds in India depends on the nature of asset, holding period, and residential status of seller; as per the income-tax laws in India.
While you qualify as a non-resident of India under the income-tax law, note that this is different from determination of residential status under exchange control law. Under the income-tax law, residential status is determined on the basis of physical presence in India. As a non-resident, you will be taxable in India only on the income earned or received in India. Capital gains on sale of equity shares will be classified as long-term capital gain (LTCG) if held for more than 12 months, and are exempt from tax provided Securities Transaction Tax (STT) has been paid. Short-term capital gain on these is taxable at 15%, plus applicable surcharge and education cess. Units of equity-oriented mutual funds, which are held for more than 12 months, are considered long-term capital asset, and gains from their sale are exempt from tax in India. Short-term capital gain on the same are taxable at flat 15% (plus surcharge, if applicable, and education cess).Units of debt-oriented mutual funds held for more than 36 months are considered long-term capital asset, and gains from their sale, after indexation, are taxable at flat 20% (plus surcharge, if applicable and education cess). Short-term capital gain is taxed at applicable slab rates.
Subject to specified conditions, LTCG can be claimed as exempt from tax to the extent it is re-invested in India in specified bonds (within 6 months from date of transfer of shares or mutual funds) or a residential house (to be purchased either 1 year before or 2 years after or constructed within 3 years from the date of transfer of shares or mutual funds). If the capital gain is not reinvested as above, before the due date of filing of tax return in India, you may deposit it in a Capital Gain Account Scheme (CGAS) with a bank and withdraw it for re-investment in the residential house property.
There is a requirement to file India ITR for an individual if the total taxable income exceeds the threshold for taxable income for the relevant financial year, which is Rs2.5 lakh for individuals. If your total capital gain along with any other income in India is more than the threshold, you have to pay applicable taxes and file the ITR in India. Tax on LTCG or STCG can be either paid by way of advance tax in four instalments, or before filing a return—along with interest—by 31 July.
If you are a resident of any other country, gains from sale of shares or mutual funds in India may be taxable in that country. In case of double taxation, benefits may be explored as per the provisions of the Double Taxation Avoidance Agreement between India and that country.
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Sonu Iyer is tax partner & people advisory services leader, EY India.