Tax on Sale of Foreign Securities in India - Kanakkupillai
Income Tax

Tax on Sale of Foreign Securities

Tax on Sale of Foreign Securities in India

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  Posted on November 22, 2021

Tax on Sale of Foreign Securities

Foreign security majorly means the security in the form of shares or debentures or stocks or bonds or any other security instruments which are denominated or expressed in the form of foreign currency.

Investors can always invest in Indian securities, including the foreign securities so as to increase the diversity of their portfolio and maximize their returns by minimizing the chance for any loss by depending on various different securities rather than depending on one. With the world, technology and market expanding beyond its geographical boundaries, we can say that the opportunities and varieties in which the investors can invest are also increasing. And here with the ways getting opened towards the foreign markets and securities pertaining to the foreign companies and its stake, our investors are actually increasing the earning capacity of the economy along with their personal earning capacity utilizing the foreign shares.

But what are tax implications which can arise from such earning which are made by the investors through their investment made in the foreign securities. The earnings made can take two forms majorly, and this includes:

  1. Dividend
  2. Capital Gains arising from the sale of securities

Tax on Sale of Foreign Securities

On sale of foreign securities, the investor will be earning a gain or loss. A gain is earned from the sale of the foreign securities by the investor when he is able to dispose off, the securities at a price which is higher than the price at which he purchased the securities at. And this shall be taxed in the hands of the Indian Resident as global income shall be taxed in such assesse’s hands. For the purpose of taxation, we can see that the foreign stocks and unlisted equity shares in India are treated at par with the other.

This gain would be taxed in the hands of the assessee under the head, ‘Income from Capital Gain’. Here the same shall be either of the below two;

  1. Long-term Capital Gain (LTCG), or
  2. Short-term Capital Gain (STCG).

The determination of LTCG or STCG shall be done on the basis of the period for which the securities are held by the investor on hand before he has sold such shares and earned such gain.

Long-term Capital Gain

Long-term capital gain or LTCG from the sale of foreign securities arises when the investor holds the foreign securities for a period of more than 24 months and sells the same at a price which is higher than the price at which the securities were bought by the assessee. Once securities are sold, gain which was made by investor shall be taxed at a flat rate of 20%.

For computing the gain or Long-term capital gain from the sale of foreign securities the following should be followed:

Full value of consideration

Less: Indexed Cost of acquisition

Less: An expense which was expended wholly and exclusively in connection with such transfer

Here, the benefit of indexation shall be availed by the investor while computing the LTCG and for this the CII (Cost of Inflation Index) will be used. This is utilized for calculating inflation adjusted cost price of an asset. And this inflation adjusted price would then be used for arriving at the LTCG or LTCL (Long-term Capital Loss). The formula for computing this indexed cost of acquisition of the shares or securities sold is given below:

Indexed Cost of Acquisition or ICOA =    [(COA)] × [(CII for the year of transfer)/ (CII for the year of acquisition or for the Financial Year 2001-02, w.e.i.l)]

Here, COA = Cost of Acquisition

CII = Cost Inflation Index

w.e.i.l = Whichever is later.

Say, Mr. X brought foreign shares amounting to INR 10 Lakhs on 01.01.2007. The same was sold by him during the February 2021 for INR 25 Lakhs. As these securities were held by Mr. X for a period of more than 24 months or 2 years, the gain or profit which is arising from the sale of the same is LTCG and should be taxed at a rate of 20% (flat). So,

Full value of consideration                  =      INR 25,00,000

Less: Indexed Cost of acquisition       =      INR 23,68,852.50

[(10,00,000)] *[(289/122)]

 

Less: Expenditure spend wholly for,

and exclusively in connection

with such transfer (if any)            =      NIL

LTCG =      INR 1,31,147.50

Tax on LTCG @ 20%                            =      INR 26,229.50

 

Short-term Capital Gain

Now, if the investor held the foreign securities for a period of 24 months or less than the same then the gain which is arising from the sale of such foreign securities shall be taxed under the head, ‘Income from Capital Gains’, as STCG or Short-term capital gains. The amount of gain derived shall be added to taxable total income of the assessee and the tax rate shall be applicable on the basis of the normal tax slab rates which would be applicable to the assessee. The STCG from sale of foreign securities shall be computed as below:

Full value of consideration

Less: Cost of acquisition of asset

Less: Expenditure that isspend wholly and exclusively in connected with such transfer

Say, say, Mr. X brought foreign shares amounting to INR 10 Lakhs on 01.01.2019. The same was sold by him during the November 2020 for INR 15 Lakhs. As these securities were held by Mr. X for a period which is less than 24 months or 2 years, the gain or profit which is arising from the sale of the same is STCG and should be added to the total taxable income of the assessee and taxed at normal tax rate applicable to the assessee as per the Income Tax Slab. So,

Full value of consideration                  =      INR 15,00,000

Less: Indexed Cost of acquisition       =      INR 10,00,000

[(10,00,000)] *[(289/122)]

 

Less: Expenditure incurred wholly

and exclusively in connection

with such transfer (if any)                  =      NIL

STCG =      INR 5,00,000

 

Thus, we can conclude that, the gain arising from the sale of foreign securities can be taxed under the head, ‘Income from Capital Gains’ and the same shall be taxed on the basis of the provisions pertaining to the same. Hence, if there is a loss arising from the sale of such foreign securities then, this shall also be treated in accordance to the provisions of this section.

 

 

 

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