There are several instances where NRIs as well as Residents have invested in shares of Indian private sector companies, especially in those carrying on business of mobile applications, software developments, hospitality etc. and gone abroad later. The value of the shares of some of these companies has gone up exponentially in recent years on account of the development of new software, new applications, new products and new services by these companies. Prospective investors are willing to buy these shares at exorbitant prices. Capital gain is substantial in these cases and the investors are keen on the tax implications on sale of such shares.
Tax on sale of unlisted shares is determined, usually, by considering the period of holding.
If the unlisted shares are held for less than 24 months, it will be categorized as `Short term capital asset’ and capital gain on transfer of such assets is taxable as per normal slab rate irrespective of the residential status.
If the shares are held for more than 24 months, it will be classified as `Long term capital asset’ and calculation of capital gain on transfer of such assets depends on the residential status of the assessee and the currency in which shares were purchased.
- Resident Indians
In case of residents, long term Capital gain on transfer of such assets is subject to tax @ 20% plus applicable surcharge plus Cess @ 4% after Cost Inflation Index.
- NRIs who originally invested in Indian Rupees
As per Section 112, rate of Tax on long term Capital gain on sales of unlisted shares by a Non-resident is 10% plus applicable surcharge plus Cess @ 4% without the Cost Inflation Index in case the original investment is made in Indian Rupees.
- NRIs who originally invested in Foreign Currency
The currency in which the shares were purchased is also a determining factor while computing Capital Gain. If the unlisted shares were purchased in foreign currency, capital gains arising from the transfer of such shares in the case of a non-resident shall be computed by converting the cost of acquisition, expenditure incurred in connection with such transfer and the sale consideration into the same foreign currency in which such shares were purchased originally. Such capital gain shall be reconverted into Indian rupees for the purpose of computing Tax on Capital gain.
Let us understand this through an illustration given below:
Amar, Akbar and Anthony who were close friends, made an investment of Rs.1,00,000/- each consisting of 1000 shares with a face value of Rs.100/-each in Triple A Pvt. Ltd. on 15th August 2001. Triple A Pvt. Ltd. developed a mobile application for E-commerce, which became very popular and user-friendly. An investor evinced keen interest in acquiring these shares. The price was negotiated and fixed at Rs.40,000/- per share. Accordingly, the total consideration per investor came to Rs.4 Crores each. They approached JAKS to compute their Capital Gain and Tax thereon.
Details of Assessee
|Residential Status at the time of Purchase||Resident||Resident||Non-Resident|
|Residential Status at the time of Sale||Resident||Non-Resident||Non-Resident|
|Purchase Cost||Rs. 1,00,000||Rs.1,00,000||AED 10,000|
Computation of Capital Gain
|Sale consideration||Rs.4,00,00,000||Rs.4,00,00,000||AED 20,00,000|
Less : Indexed Cost of Acquisition
|Gain in Indian Rupees||Rs.3,96,99,000||Rs.3,99,00,000||Rs.3,98,00,000|
|Surcharge @ 25%||19,84,950||9,97,500||9,95,000|
|Tax plus Surcharge||99,24,750||49,87,500||49,75,000|
|Cess @ 4%||3,96,990||1,99,500||1,99,000|
|Total Tax Payable||1,03,21,740||51,87,000||51,74,000|
Note 1: The exchange rate in the year 2001 and 2020 is assumed to be Rs.10 and Rs.20 respectively.
Note 2: Cost Inflation Index for the Fin./Yr.2001-02 and 2020-21 is 100 and 301 respectively.
Note 3: Rate of Surcharge for the Ass./Yr.2020-21
|Range of Income||Rate of Surcharge|
|Rs.50 lakh to Rs.1 Cr.||10%|
|Rs.1 Cr. to Rs.2 Cr.||15%|
|Rs.2 Cr. to Rs.5 Cr.||25%|
|Rs.5 Cr. to Rs.10 Cr.||37%|
|Exceeding Rs.10 Cr.||37%|
According to Section 112(2), Chapter VI-A deductions are not eligible on Long term Capital Gains irrespective of the residential status.
Though Capital gains pose huge tax burden on investors, reinvestment of sale consideration from such transfers into specified assets under section 54F (investment in new residential house) and Section 115F enables the taxpayers to enjoy the benefit of tax exemptions. As per Section 115F, a non- resident assessee is eligible to claim deduction from the Capital Gains arising on account of transfer of shares bought in foreign Currency if invested in specified assets. Specified assets include shares in Indian companies.
Author: CA Jose Zachariah , (Managing Partner)