Continuing from the last blog on capital gains, this blog specifically addresses how capital gains are to be taxed in case of nonresident Indians under the Indian tax law.This blog covers key capital gains tax issues for nonresident Indians.

Capital gains taxable in India

After reading our whitepaper titled Interaction of Indian and U.S. Tax Laws and blogs on Residence, and Basis of taxation in India, readers would now understand that nonresidents are taxable in relation to their income received, accrued or earned in India. In addition, a deeming provision taxing capital gains arising to a nonresident on transfer of capital asset located in India even when the transfer and income arises outside India. For example, capital gains on transfer between nonresidents of a residential house property located in India is to be taxed in India as the capital asset is located in India.

Another deeming provision taxing capital gain arising on indirect transfer of a capital asset between nonresidents even when capital asset is located outside India, but the value of such capital asset is derived from capital asset(s) situated in India. This clause was retrospectively inserted to tax indirect transfers in India to outweigh the decision of the Supreme Court of India in the case of Vodafone that held that transfer of shares of foreign entity is decided not to tax such capital gains in India as there is no Indian nexus.

Inflation index benefit

Unlike the resident Indians, nonresident Indians do not get indexation benefit for computing capital gains on transfer of certain capital assets which were bought in foreign currency. These assets include shares in an Indian corporation (whether public or closely held), debentures of an Indian public corporation, deposits with Indian banks and public companies, any security issued by the Indian federal government or other assets specified by the federal government.

An exemption of capital gains (in proportion to is allowed if the capital gains are reinvested in the above assets) is available to nonresidents. However, the exemption is withdrawn if thenew asset is sold within three years from the date of its purchase.

Capital gains tax rate

Nonresidents can opt for special tax rates under the Indian tax law for certain capital gains. If the tax treaty rate is more beneficial, then the individual has the option to choose such tax rate.

Nonresidents may plan and structure their investments in India from tax perspective. Capital gains on transfer of assets depend on the nature, term of holding, applicable tax rate and exemption available.