DID YOU KNOW ?? – Long term capital gains to a non-resident are taxed at flat rates without any benefit of basic exemption limit

Imagine a situation where Mr. A, a non-resident, had purchased 100 shares of ABC Ltd. on a recognised stock exchange on 08.06.2016 for Rs. 550 per share. Today the price of shares of ABC Ltd. is Rs. 1350 and Mr. A intends to sell these shares. In absolute terms, the gain per share is  Rs. 800 per share and overall gain will be Rs. 800,000. What would be the income tax payable on the same?

Income tax on capital gains depends on the duration for which the asset is held i.e. whether the asset is long term or short term. Equity shares listed on recognised stock exchange or units of equity oriented mutual funds held for more than 12 months qualify as long term capital asset as per section 2(42A) of the Income tax Act, 1961 (‘the Act’).

Unlisted shares or immovable held for more than 24 months qualify as long term capital asset. Any other assets held for more than 36 months would be long term capital asset.

In the above illustration, the shares are long term capital assets. Until Financial Year 2017-18, the long term capital gains on sale of listed equity shares or units of equity oriented mutual funds which have suffered Securities Transaction Tax were exempt u/s 10(38) of the Act.

Finance Act, 2018 inserted a new section 112A to the Act which is applicable to sale of equity shares or units of equity oriented mutual fund (which have suffered STT) on or after 01.04.2019. Consequently, the exemption u/s 10(38) of the Act is withdrawn and long term capital gains above Rs. 100,000 on sale of equity shares or units of equity oriented mutual funds which have suffered Securities Transaction Tax  is brought to tax at the rate of 10%.  There is not benefit of indexation available for long term capital gains covered under section 112A of the Act.

The interesting part here is calculation of cost of acquisition of such shares or units of equity oriented mutual fund purchased prior to 01.02.2018. Section 55 of the Act provides that for the purposes of section 112A, where the equity shares or units of equity oriented mutual fund were purchased prior to 01.02.2018, the cost of such asset shall be higher of the following:

• Actual cost of asset; and
• Lower of
  1. Fair market value of such asset and
  2. Sale price of the asset

Fair market value in case of listed equity shares or units of equity oriented mutual funds means the highest price of such asset quoted on stock exchange on 31.01.2018. In case of any other shares or units, it means the net asset value as on 31.01.2018.

Taking the above illustration as base, lets analyse three different scenarios:

Scenario 1:

In the above illustration, assuming that the highest price quoted for ABC Ltd.’s share on 31.01.2018 is Rs. 964 on BSE, the cost of acquisition will be decided as follows:

The highest prices of listed shares are available in Bhav copy on website of BSE and NSE.

Hence, the long term capital gains in the above illustration will be :

Scenario 2:

However, in the above illustration, keeping other things constant, if the price as on 31.01.2018 was Rs. 1350, then there would be no gain, no loss under the Income Tax Act. This is because Rs. 1350 would have been considered as cost of acquisition for the purpose of section 112A read with section 55.

Scenario 3:

Taking it further, what would have been the tax implication if the price of listed share as on 31.01.2018 was Rs. 2000? Keeping other things constant, the cost of acquisition would have been:

Calculation of capital gains:

Hence, there would be no gain, no loss under the Income tax Act.

The above scenarios are given for better clarity of reader. We may now move on with Scenario 1 where there is a Long Term Capital Gain of Rs. 386,000. The above calculation of long term capital gains remains the same for residents as well as non-residents. The basic difference in tax treatment is availability of basic exemption limit i.e. 250,000 (for AY 2019-20).

In case of Mr. A, since he is a non-resident, his long term capital gains above Rs. 100,000 will be taxable under section 112A. In this illustration, his taxable gain will be Rs. 286,000 (i.e. 386,000 – Rs. 100,000). Tax payable at the rate of 10%  will be Rs. 28,600.

In case of a resident, lets assume he has an interest income of Rs.20,000 and long term capital gains of Rs. 386,000. His computation will be as follows:

Further, deduction under Chapter VI-A and rebate under section 87A are not available to any assessee.

Similarly where any other long term capital asset asset like immovable property is sold by a non-resident, the gains on the same will be taxed at the rate of 20% without any basic exemption limit.