Changes to LTCG rules for NRIs; 25% hike in Tax Rate

The government has changed the long-term capital gains (LTCG) rules for unlisted shares owned by non-resident Indians. According to an amendment added during the passage of the Finance Bill (Budget) 2024, the government has abolished the advantage of foreign currency adjustment that was suggested in the Budget 2024 when presented on July 23, 2024.

Prior to July 23, 2024, NRIs investing in unlisted Indian shares were obligated to pay a 10% tax without indexation on any capital gains realized when selling the shares. There was no rule that permitted foreign currency adjustment.

LTCG with indexation versus LTCG without indexation on property: Which will benefit you more?

Budget 2024 imposed a fixed LTCG tax rate of 12.5% for all asset types. According to the proposed new rules, NRIs must pay a 12.5% tax on long-term capital gains from unlisted shares. Along with the increase in the LTCG tax rate, the finance bill proposed allowing NRIs to make foreign currency adjustments on LTCG derived from the sale of unlisted shares. This suggested foreign currency adjustment has been withdrawn.

Previously, the Budget 2024 suggested restoring the foreign exchange fluctuation benefit for non-resident investors in unlisted shares and securities, while raising the LTCG tax rate from 10% to 12.5% (excluding surcharge and cess) without indexation. The modification to the Finance Bill eliminates the benefit of foreign exchange fluctuations.

The benefit of exchange rate changes appeared to be an omission in the Finance Bill (as presented to Parliament), and it has been eliminated. The LTCG tax rate for non-residents on capital gains on the sale of unlisted shares has been raised from 10% to 12.5%, representing a 25% increase.

How this will affect returns from unlisted shares for NRIs?

This effectively increases NR investors’ LTCG tax burden from 10% without indexation to 12.5% without indexation. This brings them on par with residents, whose LTCG rate has decreased from 20% with indexation to 12.5% without indexation.

The 25% increase in the LTCG tax rate will have a substantial impact on returns made from unlisted shares.

The new LTCG tax rate equalizes the treatment of residents and non-residents, however, it may have an influence on the returns of international investors in India.

How do NRIs pay tax on LTCG from unlisted shares?

It is explained how gains from unlisted shares for NRIs are taxed.

Here’s an example. Suppose an NRI purchased 10,000 unlisted shares at Rs.20 each. At the time of investment, one USD equalled Rs.50. The total investment cost was Rs.2,00,000 (10,000 x 20). The whole cost is USD 4000.

After three years, the NRI sold the unlisted shares for Rs.30 each. The entire cash earned from selling 10,000 unlisted shares is Rs.3,00,000 (30 times 10,000). The NRI must pay LTCG tax of Rs.1,00,000 (Rs 3 lakh less Rs.2 lakh). According to the new LTCG tax rate of 12.5%, the NRI must pay Rs.12,500.

Under the previous LTCG tax rate of 10%, an NRI would have paid Rs.10,000 in taxes. The tax liability has increased by Rs.2,500. If Rs.3 lakh is to be repatriated and one USD equals Rs.60, USD 5,000 will be repatriated. There will also be additional currency exchange expenses. As a result, the rise in income tax outgo may diminish returns on unlisted Indian shares for NRIs (in addition to the impact of currency depreciation).