Equity shares of listed companies held for more than 12 months are considered long-term capital assets, and any resulting gains are treated as long-term capital gains (LTCG). LTCG is generally taxed at 12.5% (plus applicable surcharge and cess), subject to relief under the relevant Double Taxation Avoidance Agreement (DTAA).
The Income-tax Act, 1961 provides certain provisions for NRIs and Persons of Indian Origin (PIOs) under Chapter XII-A (Sections 115C to 115I). Under these provisions, capital gains may be exempt from tax if the sale proceeds are reinvested, subject to the following conditions:
• The taxpayer must be an NRI or PIO.
• The asset transferred must fall within the category of specified assets (shares of an Indian company being one such specified asset).
• The shares must have been acquired using convertible foreign exchange (e.g., funds from an NRE account, FCNR account, or foreign inward remittance).
• The net consideration (i.e., gross sale consideration less transfer expenses) must be reinvested in specified assets (including shares) within six months from the date of transfer.
Where these conditions are satisfied, the capital gains from the sale of such shares are exempt to the extent the net consideration is reinvested in specified assets. Where only a portion of the net consideration is reinvested, the exemption is allowed on a proportionate basis.
However, to retain this exemption, the reinvested asset must be held for a minimum period of three years. If the reinvested shares are sold or otherwise transferred before the completion of three years, the exemption earlier availed will be withdrawn, and the capital gains so exempted shall become chargeable to tax in the year of such transfer.
Further, under these provisions, where your only income consists of long-term capital gains from the transfer of specified assets, and appropriate tax has been deducted at source (TDS) and deposited, filing of a return of income in India is not mandatory.
However, if TDS has already been deducted and you are claiming exemption on account of reinvestment, it is advisable to file an income tax return in order to claim the corresponding refund.
Harshal Bhuta is partner at P. R. Bhuta & Co. CAs
