I have been living in Hong Kong for the past 10 years and have been making regular investments in Indian capital markets. I invested in a Gold exchange-traded fund (ETF) in India, which I have held for more than three years. I have a bearish view on gold prices, given recent geopolitical developments, and want to sell these units. I would like to understand the tax implications upon sale.
—Name withheld on request
Given that you have been residing in Hong Kong for the last 10 years, it is presumed that you qualify as a non-resident under the provisions of the Income Tax Act, 1961. An ETF qualifies as a “security” and, accordingly, constitutes a capital asset under Indian tax law. Any profit arising from the transfer of such a capital asset is chargeable to tax under the head “capital gains”.
The characterization of such capital gains as short-term or long-term depends on the period of holding of the asset. Since a Gold ETF is a listed security, a holding period exceeding 12 months renders it a long-term capital asset. Consequently, gains arising from its transfer are treated as long-term capital gains (LTCG), which are taxable at the rate of 12.5%, together with applicable surcharge and health and education cess.
Accordingly, in your case, as the Gold ETF has been held for more than 12 months, the gains arising on its sale would qualify as LTCG and would be taxable in India in accordance with the above provisions.
It may be noted that the flat exemption of ₹1,25,000 in respect of LTCG is restricted only to gains arising from the transfer of listed equity shares and units of equity-oriented mutual funds. As a Gold ETF does not qualify as an equity-oriented instrument, this exemption is not available in the present case.
Accordingly, the entire amount of LTCG arising from the sale of the Gold ETF would be chargeable to tax at a rate of 12.5%, together with the applicable surcharge and health and education cess.
Further, given your status as a non-resident, reference may be made to the India-Hong Kong Double Taxation Avoidance Agreement (DTAA) to examine whether any beneficial tax treatment is available. Article 14 of the India-Hong Kong DTAA governs the taxation of capital gains and confers taxing rights on both India and Hong Kong in respect of gains arising from the transfer of such assets. The treaty does not provide for any exclusive exemption or concessional rate in either jurisdiction for gains from the transfer of a Gold ETF.
Consequently, the LTCG arising from the sale of the Gold ETF would remain taxable in India in your case.
Harshal Bhuta is a partner at P. R. Bhuta & Co. Chartered Accountants.
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