Tax Relief On Capital Gains For Foreign Investors Investing in India

Taxes on Capital Gains for Foreign Investors

A huge relief came for the Foreign Investors after Finance Secretary Hasmukh Adhia clarified that Foreign Investors in India don’t need to pay tax on past gains on investments in the equity market. This announcement came soon after India’s S&P BSE Sensex equity index dropped 2.3 percent. This fall was mainly attributed to the rising fears among the investors after Finance Minister Arun Jaitley said India would end a tax break on equity investments. The fine print of the tax seemed to apply only to domestic investors, sparking fears that foreigners may be taxed retrospectively on gains. "As far as grandfathering and the limit for levy of tax is concerned it applies to both residents and non-resident investors," Mr Adhia said. In 2004, India abolished long-term capital gains (LTCG) tax on shares and replaced it with a securities transaction tax (STT).

Impact of this law on Foreign Investors

Existing law will be applicable till March 31 and the LTCG tax will be applicable on profits made after this period. Also if a stock has been sold after April 1 after having been held for over a year, LTCG tax will be calculated on the basis of the acquisition price or closing price on January 31, whichever is higher. Tax is not applied on LTCG in a year of amount up to INR 1,00,000. Any gains realized beyond this amount are taxable. So if you made long-term gains of INR 1,75,000 in a year, then the LTCG tax is applicable only on INR 75,000 (1,75,000 – 1,00,000).

Also if an investor sells stock or equity mutual fund held for over a year after April 1, LTCG tax will be calculated on the basis of the acquisition price or closing price on January 31, whichever is higher. For example if you have purchased a stock on January 10, 2017, let’s say for Rs 500, which on January 31, 2018 closed at a higher rate of INR 700. Now if sold after March 31, LTCG tax will be calculated based on the closing price of January 31, which is higher. But if you have purchased a stock on January 10, 2017, let’s say for Rs 500, which on January 31, 2018 closed at a lower rate of INR 300 then, if sold after March 31, LTCG tax will be calculated based on the acquisition price of January 10, which is higher in this case.

What is Capital Gains tax?

It is the tax paid by an individual/company on the profits generated by the sale of “capital asset” such as stocks, shares, building, vehicles, patents, trademarks, land, house property leasehold rights, machinery, and jewelry. Capital Gain taxes are only applicable when the individual holding the asset sells the asset. In cases where the assets are inherited, capital gains tax is not applicable.

Capital Gains Tax in UK

Capital Gains Tax is the tax applicable on profits/gains when you/your business (be it a small business or a limited company ) sell, transfer or give away your property. Currently the tax-free allowance is £11,300 and for trusts it is £5,650. In UK, you pay Capital Gains Tax on-

1. Personal Possessions (mostly) that is above £6,000, apart from your car.
2. Business Assets
3. Property that is not considered as your main home.
4. Shares that aren’t in ISA or PEP

Capital Gains Tax in India

Capital Gains Tax is the tax applicable on the profits/gains made on the transfer of capital assets. Capital asset is defined to include the property owned by an assessee and any securities held by a FII which has invested in such securities in accordance with the regulations made under the SEBI Act, 1992. Buildings, constructions, land, car (or any vehicle), patents and machines used.

Agricultural land, special bearer bonds, gold deposit bonds, raw materials used for productions are not considered as capital assets.

Long Term Capital Gain - An asset that is held for more than 36 months is a long-term capital asset and any gains realized from selling it is considered as Long Term Capital Gain. However, from FY 2017-18 onwards the period has been reduced to 24 months (applicable till 31st March, 2017)

Short Term Gain - A short-term gain is a capital gain realized by the sale or exchange of a capital asset that has been held for exactly one year or less.

What is Grandfathering?

‘Grandfathering’ is a clause in which an old rule continues to be applied for some provisions in the current situation while the new rule is to be applied for future situations. In case of LTCG, grandfathering will be applied for existing investors (both residential and non-residential) and any gains they have made till the new tax laws are established.

Conclusion

For India

In the first year, India has budgeted for around 200 billion rupees from the capital gains tax. If the current trend of the stock market continues, then collections are expected to double in the following year.

For Investors

Post this law, people investing will be liable to pay 10% on the profits/gains being made on selling/transferring of stocks which is at least one lakh more than the cost of the shares being purchased. If a person is looking to sell the shares before one year lapses, in that case they will be charged Short Term Capital Gain (STCG) tax, which is actually higher at 15%. One possible way for investors to save their tax money is by selling their shares before its prices get more than one lakh over the basic cost price (also the time period has to be more than 1 year). There are certain other methods that an investor needs to keep in mind before selling their property and that is why it is important they consult with an expert accountant before taking any decision.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.