I recently became an NRI after moving to Germany. While I was a resident, I had invested through portfolio management services (PMS) managed by a SEBI-registered portfolio manager in India. During the current financial year, I’ve realized gains from the sale of listed equity shares with holding periods ranging from three months to five years. What are the applicable tax implications for an NRI on these gains?
–Name withheld on request
The Indian income tax law defines a ‘capital asset’ broadly to include any kind of property held by a taxpayer, except for property held as stock-in-trade and certain personal assets. With respect to listed equity shares, the Central Board of Direct Taxes (CBDT), through its circulars, has clarified that a taxpayer has the flexibility to classify listed shares either as stock-in-trade or investments.
For listed shares held for more than 12 months, the taxpayer may choose to treat them as investments, making the gains eligible for capital gains tax. Once the taxpayer takes this position, the tax authorities cannot dispute it. Conversely, if the taxpayer classifies listed shares as stock-in-trade irrespective of the holding period, the resulting gains are treated as business income.
Whereas for listed shares held for less than 12 months, the taxpayer may still classify them as investments based on certain parameters such as the intent or motive behind the purchase (profit versus appreciation), treatment in the books (investment versus stock-in-trade), frequency and the volume of transactions (ratio between purchases and sales and the holding period), source of purchases (own funds versus borrowed funds), among others.
When shares are treated as stock-in-trade, the resultant business income is taxed at the individual’s applicable income tax slab rate (plus applicable surcharge and cess). On the other hand, the gains derived from listed shares held for more than 12 months qualify as long-term capital gains (LTCG) and are taxed at a rate of 12.5% (plus applicable surcharge and cess). If held for less than 12 months, the gains are treated as short-term capital gains (STCG) and taxed at 20% (plus applicable surcharge and cess).
An exemption of up to ₹1,25,000 is available on LTCG from the sale of listed equity shares, so only gains exceeding this amount are taxable. For NRIs, the PMS provider usually deducts tax at source (TDS) before crediting funds to the NRI’s account.
Further, since you are a non-resident, recourse may be taken to the India-Germany DTAA if it provides for more beneficial treatment compared to the Indian domestic law. As per Article 13 of the India-Germany DTAA, India has the right to tax gains arising from the sale of shares of listed Indian companies in accordance with its domestic tax laws. However, if these shares are treated as stock-in-trade by you, and in the absence of any permanent establishment (PE) in India, the resulting business income would not be taxable in India under Article 7 read with Article 5 of the DTAA.
For claiming treaty benefits, you will be required to obtain a tax residency certificate (TRC) from the German tax authorities and furnish Form 10F on the Indian income-tax portal.
Harshal Bhuta is a partner at P. R. Bhuta & Co. Chartered Accountants.
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