Capital Gain in the case of Transfer of Shares/Debentures by Non-Residents (NRI)

Capital Gain in the case of Transfer of Shares/Debentures by Non-Residents (NRI) (Proviso 1 to Section 4 and Rule 115A) :

As already discussed, in the case of long-term capital gain, the cost of acquisition and cost of improvement thereto are both indexed. However, in the case of an assessee who is a non-resident, any capital gain, whether short-term or long-term, arising from the transfer of a capital asset being shares/debentures of an Indian company, bought in foreign currency, shall be computed in the following manner and no indexation of cost will be done, even if it is a long-term capital gain:

(a) Cost Of Acquisition shall be converted into the foreign currency, which was initially utilised in the purchase of such shares/debentures. For the purpose of such a conversion, average rate of TT buying and TT selling, on the date of acquisition of such shares/debentures, shall be taken;

(b) Expenses Of Transfer will also be converted into the same foreign currency, which was initially utilised for acquisition of such shares/debentures. For the purpose of conversion average rate of TT buying and TT selling, on the date of transfer, shall be taken;

(c) Full Value Of Consideration shall also be converted into the same foreign currency which was initially utilised for purchase of such shares/debentures. Here also the average rate of IT’ buying and TT selling rate of the foreign currency, on the date of sale, shall he taken;

(d) Capital Gain will now be computed as under:

full value of consideration (converted into foreign currency at average TT buying and TT selling rate on date of sale) –

Less: (i) expenses on transfer (converted into foreign currency at average TT buying and TT selling rate on the date of sale) –

(ii) cost of acquisition (converted into foreign currency at average TT buying and — TT selling rate on the date of acquisition) –

Capital gain in foreign currency –

(e) the capital gain in foreign currency, which may be long-term or short-term, shall be converted into Indian rupees at the IT buying rate only (not the average rate) on the date of transfer of the capital asset.

Notes:
1. Telegraphic transfer buying/selling rates in relation to a foreign currency is the rate of exchange adopted by the State Bank of India for purchasing or selling such currency, where such currency is made available by that bank through telegraphic transfer.

2. The transferor should be a non-resident at the time of transfer. Non-resident includes a foreign company who is non-resident.

3. This proviso is not applicable to units of UTI and mutual funds.

4. The shares and debentures (whether listed or non-listed) of Indian companies only are covered under this proviso. Indian company shall include Government company. However, bonds of Central Government/State Government and RBI are not covered for this purpose.

5. The first proviso to section 48 is mandatory. Hence the non-resident covered by this proviso is not allowed to opt for indexation of cost (i.e., 2nd proviso to section 48).

6. If the shares and debentures are acquired by the non-resident in Indian currency, the second proviso to section 48 relating to indexation will apply only to shares as debentures are not eligible for indexation.

7. It may be noted that long-term capital gain on equity shares sold through a recognised stock exchange on or after 1.10.2004 shall be exempt.

Example-1 :

R, a non-resident Indian, remits US $40,000 to India on 16.9.1989. The amount is partly utilised on 3.10.1989 for purchasing 10,000 shares in A Ltd., an indian company at the rate of Rs.12 per share. These shares are sold for Rs. 75 per share on 30.3.2022.

The telegraphic transfer buying and selling rate of US dollars adopted by the State Bank of India is as follows:

	Buying	Selling
	(1 US $)	(1 US $)
16.9.1989	18	20
3.10.1989	19	21
30.3.2022	74	76

Compute capital gain chargeable to tax for the assessment year 2022-23 on the assumption that these shares have not been sold through a recognised stock exchange.

Solution :

	US $
Sale consideration (Rs. 7,50,000/75)	10,000
Less: Cost of acquisition (Rs. 1,20,000/20)	6,000
Long-Term Capital Gain	4,000
Capital Gain Converted into Rupees (Rs. 4,000 x 74)	2,96,000