Special Provisions for Tax on sale of Shares/Mutual Funds by NRI

When a NRI invests in the stock market of India, he is subject to capital gain tax on the profit earned through trading done in India.

There are two types of capital gains applicable in India:

• Short Term Capital Gains
• Long Term Capital Gains

The Capital Gain is the difference between the cost of purchase and the sale price received.

Capital Gains = Sale Price – Purchase Price – Expenses incurred

Classification under Long Term and Short Term depends upon the period for which the shares/mutual funds are held. The manner of levy of Tax is different for Gains arising on Sale of Shares/ Mutual Funds and is different in case of Sale of Property by NRI. This article only explains the manner of levy of Income Tax in case of Sale of Shares/ Mutual Funds. 

Short Term Capital Gains

Short term capital gains is the gain that arises on sale of shares/mutual funds when the shares/mutual funds are sold before the expiry of 1 year from the date of purchase of such shares/mutual funds.

The tax rate applicable on the gain is 15%.

Long Term Capital Gains

Long term capital gain is the gain arising on the transfer of shares/mutual funds after a period of 1 year from the date of purchase provided Securities Transaction Tax has been paid on the same.

The tax rate applicable is as follows

Shares sold before 31st March 2018 – Exempt

Shares sold on or after 1st April 2018 – 10% (without indexation*)

*Indexation is the adjustment in the cost of the purchase due to inflation.

Provisions to calculate Long Term Capital Gain

The revised provisions are applicable from 1.4.2018. Therefore, any capital gains arising from sale of shares/mutual funds during the period 1.2.2018 to 31.3.2018 shall be exempt.

Also under the revised provisions, any long term capital gain arising from sale of shares/mutual funds before 31.1.2018 shall be exempt.

Thus, if you purchase shares/ mutual funds on 1-4/2016 and sell shares/mutual funds on 2.5.2018, the capital gain from 31.1.2018 to 2.5.2018 will only be taxable. While calculating gain on the taxable part, there are additional provisions that need to be taken care of with respect to the calculation of sale and purchase price of the shares/mutual funds. Broadly there are three cases for the same:-

1. Sale Price is more than the Fair Market Value as on 31.1.2018

In this case, the purchase price of the shares/mutual funds will be Actual Cost of shares/mutual funds or the Fair Market Value of shares/mutual funds as on 31.1.2018, whichever has a higher value.

The Sale Price will be the actual sale price.

2. Sale Price is less than the Fair Market Value as on 31.1.2018 but more than the Actual Cost

In this case, the purchase price of the shares/mutual funds will be Actual Cost of shares/mutual funds or the Fair Market Value of shares/mutual funds as on 31.1.2018, whichever has a higher value.

The Sale Price will be the Fair Market Value.

Note: The intention of the law here is to not allow losses generated due to the change in provisions.

3. Sale Price is less than the Actual Cost of shares/mutual funds when acquired

In this case, the purchase price of the shares/mutual funds will be the Actual Cost of shares/mutual funds.

The Sale Price will be the Actual Sale Price.

Note: The intention of the law here is to protect the assessee from genuine hardship and allow actual loss.

Let’s see the provisions with the help of an example

Example: Mr. Suyash purchased shares/mutual funds for Rs. 300,000 on 1.5.2013. He sold the shares/mutual funds on 5.6.2018 at the following rates . FMV as on 31.1.2018 ia Rs. 500,000

Case 1: Sale Price- 700,000 (SP>FMV)
Case 2: Sale Price- 400,000 (SP<FMV)
Case 3: Sale Price- 200,000 (SP<Actual Cost)

Let’s compute the capital gains in each case, and calculate the tax liability

Case I: Calculation of capital gain when shares/mutual funds are sold at Rs. 700,000

Since the period of holding is more than 1 year, it will be long term capital gain.

Capital Gain (Taxable Part)=Sale Price – Purchase Price

= 700,000 – 500,000*
= 200,000

Calculation of purchase price:

When Fair Market Value is more than the Actual Purchase Price, the Purchase price will be considered as the Fair Market Value.

Here,

FMV= 500,000
Actual Purchase Price= 300,000
Since, FMV>Actual Purchase Price, Purchase price here will be Rs. 500,000

Case II: Calculation of capital gain when sale price is Rs. 400,000

Since the period of holding is more than 1 year, it will be long term capital gain.

Capital Gain (Taxable Part)=Sale Price – Purchase Price
= 500,000* – 500,000
= Nil

Calculation of sale price:

When Sale Price is less than the Fair Market Value, the Fair Market Value will be considered as the Sale price.

Here,

Sale Price= 400,000
Fair Market Value= 500,000

Since, Sale Price<Fair Market Value, Sale price here will be Rs. 400,000

Calculation of purchase price:

When Fair Market Value is more than the Actual Purchase Price, the Purchase price will be considered as the Fair Market Value.

Here,

FMV= 500,000
Actual Purchase Price= 300,000

Since, FMV>Actual Purchase Price, Purchase price here will be Rs. 500,000

Case III: Calculation of capital gain when sale price is Rs. 200,000

Since the period of holding is more than 1 year, it will be long term capital gain.

Capital Gain (Taxable Part)=Sale Price – Purchase Price

= 200,000 – 300,000*
= (100,000) Loss

Calculation of purchase price:

When Sale Price is less than the Actual Purchase Price, the Actual Purchase price will be considered as the Purchase Price.

Here,

Sale Price= 200,000
Actual Purchase Price= 300,000

Since, Sale Price<Actual Purchase Price, Purchase price here will be Rs. 300,000

Special provisions for Shares/Mutual Funds purchased in Foreign Currency

(Provision applicable only for NRI who has purchased shares in foreign currency)

In case, where an NRI purchases shares/mutual funds in foreign currency, the following provisions are applicable to calculate capital gains. This section was introduced to protect the investor from tax on devaluation of Rupee.

Special Provision for calculation of Capital Gain:

The first rule for the applicability of this section is that the shares/mutual funds should have been purchased in foreign currency only. In case the shares/mutual funds have been purchased in INR but sold after the person became NRI – these special provisions would not be applicable and the normal provisions would be applicable.

The Capital gain is computed in the same currency in which shares/mutual funds were acquired.

(i) Convert Sale Price in Indian currency into foreign currency at average* exchange rate on the date of transfer.

(ii) Convert Purchase price in Indian currency into foreign currency at average* exchange rate on the date of purchase.

(iv) Convert expenditure on sale incurred in Indian currency into foreign currency at average* exchange rate on the date of transfer.

(v) Calculate the capital gain in foreign currency using the formula, 

Capital Gains = Sale Price – Purchase Price – Expenses incurred

(vi) Convert the capital gain calculated in step 5 into Indian currency at the buying rate on the date of transfer

*Average exchange rate is the average of telegraphic transfer buying rate and telegraphic transfer selling rate of exchange adopted by the State Bank of India for purchasing or selling such currency.

Now, let’s take an example to learn the above given example better,

Example:

Suppose Mr. Varun, who resides in U.S. has purchased the shares/mutual funds in India. The following are the details with respect to his transactions.

Solution:

Step 1: The first condition to check is that the shares/mutual funds are purchased in foreign currency. In our example, Varun has purchased the shares/mutual funds in foreign currency..

Step 2: We need to convert the purchase price in foreign currency based on the average rate applicable on the purchase date which is-

Average Rate= (50+48)/2= 49
Conversion= 490,000/49= $10000

Step 3: We need to convert the sale price in foreign currency based on the average rate applicable on the date of sale which is-

Average Rate= (50+55)/2= 52.5
Conversion= 800,000/52.5= $15238

Step 4: We need to convert the expense amount in foreign currency based on the average rate applicable on the date of sale which is-

Average Rate= (50+55)/2= 52.5
Conversion= 5250/52.5= $100

Step 5: Calculation of capital gain

Capital Gain= Sale Price- Purchase Price- Expenses on transfer
Capital Gain= 15238- 10000- 100
= $5138

Step 6: Convert the capital gain into Indian currency at the buying rate on the date of transfer.

Capital Gain in rupees= 5138*55= 282,590

Step 7: Calculation of tax.

Since, the period of holding is less than 1 year, it is short term capital gain and subject to taxation at the rate of 15%

Tax on capital gains= 15% * 282,590
= Rs. 42,388

TDS on sale of shares/mutual funds by NRI

When an NRI trades in shares/mutual funds, he is subject to the TDS provisions under section 195. Here the NRI receives the payment after deduction of tax.

Normally, the TDS on payment to NRI is deducted on the entire sale consideration. However, in case of Shares and Mutual Fund transactions – the TDS is required to be deducted from the Capital Gains only.