Our whitepaper titled Interaction of Indian and U.S. Tax Laws lays out a brief outline on capital gains tax in India. A resident or non-resident Indian is taxed on capital gains derived from transferring, selling or exchanging capital assets in India unless those gains are specifically excluded from taxation. Gifts or bequests under a will are specifically excluded from the definition of transfer of a capital asset.

In determining the capital gains tax impact on transfer of a capital assets following questions have to be answered:

  • who is the taxpayer – natural person, corporation or any other?
  • what is the period of holding the capital asset?
  • what is the nature of the capital asset?
  • what will the taxpayer do with capital gains or processed received on transfer?
  • what is the residential status of the taxpayer?

The first four questions set out the computation of capital gains and determine if any exemption is available. The last question largely impacts the capital gain tax rate to be applied. In this blog we are scoping the first four questions and the last question will be addressed in the following blog.

The Indian tax law prescribes certain capital gains to be exempt to tax if proceeds are invested in specific ventures by certain taxpayers. This also covers the question regarding the taxpayer’s intention to invest the capital gains. For example, following capital gains are exempt to tax for individuals, subject to satisfaction of conditions.

Capital gain on Investment into Conditions
Capital gain arising from transfer of a long-term residential house Capital gain is invested for purchase or construction of a new residential house in India within one year before or two years from the transfer date Capital gain is withdrawn where the taxpayer sold the new residential house within 3 years of date of purchase
Capital gain arising from transfer of any long-term capital asset except residential house Net consideration is invested in purchase or construction of a new residential house in India within one year before or two years from the transfer date
Capital gain arising from transfer of an agricultural land used for 2 years for agricultural purposes Capital gain is invested in purchase of new agricultural land (rural or urban) within 3 years from the date of transfer Capital gain exemption is withdrawn if the new urban agricultural land is sold within 3 years of date of purchase
Capital gain arising on transfer of any long-term capital asset Proceeds are invested in bonds issued by National Highway Authority of India and Rural Electrical Corporation Limited Capital gain exemption is available only if the bonds are not redeemed within 5 years of their acquisition
Capital gain arising on transfer of long-term residential house Proceeds are invested to purchase equity shares of eligible Indian corporations Capital gains exemption is withdrawn if the shares are sold within 5 years from their purchase

In computing capital gains the nature and period of holding of the capital asset are important. A capital asset held for not more than 36 months is a short-term capital asset. The term is reduced to 24 months for certain capital assets and is further reduced to 12 months in case of certain specific assets. Below is a table of capital assets with their period of holding.

Asset Period of holding Short term / long term
36 months
Debt mutual funds not more than 36 months short term
Other than assets specifically stated in this table 36 months or more long term
24 months
Immovable property not more than 24 months short term
Unlisted shares 24 months or more long term
12 months
Listed equity shares not more than 12 months short term
Equity oriented mutual funds 12 months or more long term
Zero coupon bonds, whether quoted or unquoted

The computation of capital gain is generally the difference between net consideration and acquisition cost (including improvement cost). For capital assets held for long term, the acquisition and improvement costs have to be indexed to cover the effect of inflation. But A capital asset means property of any kind held by a taxpayer with few exceptions like stock-in-trade, personal effects, agricultural land in India.

 

For more information, please contact:
Head of US-India Tax Desk
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