I hold a non-resident ordinary (NRO) portfolio investment scheme (PIS) account, which I use to trade in the Indian stock market. Can I claim exemption for the short-term capital gains (STCG) tax that I pay for my trades? Also, if I have a non-resident external (NRE) PIS account, will I still have to pay STCG or are only long-term capital gains (LTCG) exempt for trades done through NRE PIS?
—Name withheld on request
Taxability of capital gains arising from sale of shares listed on a recognized stock exchange in India depends on the holding period and residential status of the seller.
Capital gains are taxable as the difference between the sale consideration less cost of acquisition less cost of transfer. Shares listed on a recognized stock exchange are classified as long term if they are held for more than 12 months. LTCG is taxed at 10% (plus applicable surcharge and health and education cess) on amounts exceeding ₹1 lakh, with the benefit of grandfathering of cost of acquisition up to 31 January 2018. STCG is taxable at 15% (plus applicable surcharge and health and education cess).
Subject to specified conditions, LTCG can be claimed as exempt from tax to the extent that it is reinvested in one residential house in India (to be either purchased within one year before or two years after or constructed within three years of transfer of the long-term capital asset). But the condition is that the taxpayer should not be owning more than one house (other than the house on which re-investment benefit is to be claimed) on the date on which LTCG arises. There are also certain restrictions on the sale of a new house bought. If this capital gain is not invested until the due date of filing of tax return in India, you may deposit the amount in a Capital Gains Account Scheme (CGAS) with a bank (not later than the due date of filing returns), and subsequently withdraw this amount for re-investment. If the entire amount is not reinvested or deposited in CGAS, the remaining portion of the gains will be taxable.
In addition to the above, there is a special scheme of taxation for non-resident Indians (NRIs) who invest in India through convertible foreign exchange. Under this, NRIs may claim roll-over exemption of tax on LTCG on transfer of specified assets (including shares in Indian companies) for reinvestment of net consideration in another specified asset within months from the date of transfer. Further, there is a lock-in period of three years for the new asset breach, which results in “claw back" of exempt LTCG. The NRI taxpayer can opt out of this scheme by filing ITR and declaring that the provisions of this chapter shall not apply to him for that tax year. Such option is available on a year-on-year basis. Tax on LTCG or STCG can be either paid by way of advance tax in four instalments (15% by 15 June, 45% by 15 September, 75% by 15 December, and 100% by 15 March) or before filing ITR along with applicable interest payment.
In your case, your will need to pay STCG or LTCG (as applicable) on trades done through both NRO PIS and NRE PIS as the trades may not be through convertible foreign exchange. In case of double taxation in the country in which you are a resident, the benefit of tax treaty may be separately analyzed.
Sonu Iyer is tax partner and people advisory services leader, EY India.