I get a lot of enquiries from my NRI clients about implications of taxation on investments in mutual funds or any other securities in India. There is lot of confusion as few provisions of Indian income tax is different when redemption is done by NRIs as compare to when redemption is done by residents Indian. Let’s first understand what is Capital Gain and few other basic terms which is important to understand the tax implications on securities.

>> Capital Asset:

Any property of any kind, movable or immovable, tangible or intangible excluding stock in trade, personal effects like apparel or furniture, Rural agriculture land, gold bonds.

>> Types of Capital asset:

There are two types of capital asset depending on period of holding.

Generally, Capital assets held for not more than 36 months are Short term and if holding period is more than 36 months then they are considered as Long term. But there are few exceptions which are shared in the Table A.

>> Capital Gain/Loss

Short term capital Gain/Loss:

  • Full value of Consideration
  • Less: Expenditure incurred in connection with transfer
  • Less: Cost of acquisition
  • Less: Cost of improvement
  • Short term Capital Gain/Loss

Long term Capital Gain/Loss:

  • Full value of Consideration
  • Less: Expenditure incurred in connection with transfer
  • Less: Indexed Cost of acquisition
  • Less: Indexed Cost of improvement
  • Long term Capital Gain/Loss

*Indexed Cost means Cost after giving benefit of inflation

i.e

Cost of acquisition or improvement x Cost inflation index (CII) of year in which asset is transferred
CII for the year in which asset was first held or 2001-02 whichever is later

There are few exceptions where indexation benefit is not given even if a person has long term capital gain/loss. For example: Long term capital gain on sale of Equity shares or a unit of Equity oriented mutual fund on which STT is paid(Section 112A). See Table A.

>>Basic Exemption

As per slab rate, applicable for F.Y 2021-22 on NRIs and residents, there is no tax if total income earned/received in India is below basic exemption limit of INR 2,50,000. There are few exceptions which are mentioned in Table A

>> Deductions of Chapter VI A

If a person is doing tax saving investments, donations, permitted expenditures or have taken prescribed kind of health/life policies then he can claim deductions from his gross total income (Chapter VI A of Income Tax Act). This can help him to reduce his tax liability. Deduction u/s 80C claimed on the basis of Life insurance premium payment, Principal repayments on loan for the purchase of a house property, Investments in ULIPs (Unit-linked insurance plan) or ELSS (Equity Linked Savings Scheme) and 80D like premium paid for health insurance are the most common among NRIs.

>> Now Coming back to tax implication on securities like equity, debentures, equity oriented mutual funds, debt oriented mutual funds, units of Unit Trust of India, unlisted shares etc. which are also considered as Capital Assets. I have tried to cover few important provisions here regarding few common securities:

Table A

Type of Security Period of Holding/Type of capital asset Rate of Tax Availability of  benefit of basic exemption limit as per slab rate Availability of Chapter VI A Deductions
Equity shares  or equity oriented mutual funds and STT is paid Not more than twelve months- Short term At the rate of 15 % (Section 111A of the Income Tax Act, 1961) NRI- Not Available Resident –Available NRI- Not Available Resident – Not Available
Equity shares or equity oriented mutual funds and STT is paid More than twelve months- Long term At the rate of 10% over and above INR 1 Lakhs- without indexation (Section 112A of the Income Tax Act, 1961) NRI-Not Available Resident- Available NRI- Not Available Resident- Not Available
Debt or Debt mututal funds Not more than thirty six months-Short term As per Slab Rates  NRI- Available Resident - Available NRI- Available Resident - Available
Debt or Debt mutual funds More than thirty six months- Long term At the rate of 20% with indexation (Section 112 of the Income Tax Act, 1961) NRI- Not Available Resident - Available NRI- Not Available Resident – Not Available
Unlisted Share Not more than twenty four months- Short term As per Slab Rates NRI- Available Resident - Available NRI- Available Resident - Available
Unlisted Share More than twenty four months- Long term NRI- at the rate of 10 % without indexation benefit and without applying the first provision to Section 48
Resident - at the rate of 20% with indexation (Section 112 of the Income Tax Act, 1961)
NRI-Not Available Resident- Available NRI- Not Available Resident – Not Available
Unlisted securities other than shares of a company Not more than thirty six months-Short term As per Slab Rates NRI- Available Resident - Available NRI- Available Resident - Available
Unlisted securities other than shares of a company More than thirty six months- Long term NRI- at the rate of 10 % without indexation benefit and without applying the first provision to Section 48 Resident - at the rate of 20% with indexation (Section 112 of the Income Tax Act, 1961) NRI-Not Available Resident- Available NRI- Not Available Resident – Not Available

Basically:

  1. Benefit of basic exemption limit and deductions of chapter VI A is not available to NRIs, if the only income they are earning in India is Long term capital gain.
  2. Benefit of basic exemption limit and Chapter VI deduction is not available to NRIs, if they have only income from Equity share or Equity Oriented fund. It doesn’t matter whether income is Short term or Long term.
  3. Basic exemption limit benefit is available to residents in all cases
  4. Chapter VI deduction benefit is not available on Equity share or Equity-oriented fund on which STT is paid. It doesn’t matter whether a person is resident or non-resident and type of asset is Short term or Long term.
  5. Residents are not eligible to claim benefit of deductions of chapter VI A, if the only income they are earning in India is long term capital gain.
  6. STCG on Equity or Equity Oriented Mutual fund is taxed at a flat rate of 15%.
  7. STCG on Securities other than Equity or Equity Oriented Mutual funds is taxed as per slab rate.
  8. LTCG is taxed at the rate of 10% without indexation or 20% with indexation depending on the category it comes. Also, there is exemption of INR 1 Lakh if there is LTCG on  equity and equity oriented mutual funds.

There are many other concepts like Grandfathering clause on equity investments, investment in foreign currency, Capital gain on other assets, Carry forward of losses etc which I will discuss in my other blogs.

Disclaimer: In this article, I tried to explain the process in simple language just to give you a rough idea about taxability of securities. Please note, facts and figures of each case are different and we advise you to take professional advice to know tax implications in your case. Please do let me know if you still have any questions related to above. You can write to me at ushma@nricaservices.com or call/WhatsApp me at +91 9910075924.

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