Income Tax 2025

Appearance

Capital gains on transfer of foreign exchange assets not to be charged in certain cases ​

215(1) ​

Where, in case of an assessee, being a non-resident Indian,––

  • (a) any long-term capital gains arises from the transfer of a foreign exchange asset (herein referred as original asset); and
  • (b) within six months after the date of such transfer, he has invested the whole or any part of the net consideration in any specified asset (herein referred as new asset), then the capital gains shall be dealt with in the following manner:— (i) if the cost of the new asset is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged under section 67; (ii) if the cost of the new asset is less than the net consideration in respect of the original asset, then the capital gain computed by the following formula shall not be charged under section 67:–– A=B×C D Where, A = the capital gains not to be charges being computed; B = whole of the capital gain; C = cost of acquisition of the new asset; D = net consideration in respect of the original asset.

215(2) ​

For the In sub-section (1),–

  • (a) “cost”, in relation to any new asset, being a deposit referred to in section 212(e)(iii)(v), means the amount of such deposit;
  • (b) “net consideration” in relation to the transfer of the original asset, means the full value of the consideration received or accruing as a result of the transfer of such asset as reduced by any expenditure incurred wholly and exclusively in connection with such transfer.

215(3) ​

Where the new asset is transferred or converted (otherwise than by transfer) into money, within three years from date of its acquisition, the capital gain arising from transfer of original asset not so charged under section 67 shall be deemed to be income by way of capital gains of the tax year in which such transfer or conversion takes place relating to capital assets other than short-term capital assets of the tax year in which the new asset is transferred or converted (otherwise than by transfer) into money.

Explanation

Section Summary: ​

This section provides a tax benefit to non-resident Indians (NRIs) on long-term capital gains arising from the transfer of foreign exchange assets. If the NRI reinvests the proceeds from the sale of the original asset into a specified asset within six months, the capital gains tax can be either fully or partially exempt. However, if the new asset is sold or converted into money within three years, the previously exempted capital gains will be taxed in the year of such sale or conversion.

Key Changes: ​

  1. Eligibility: This section specifically applies to non-resident Indians (NRIs) and their investments in foreign exchange assets.
  2. Reinvestment Requirement: The NRI must reinvest the net consideration from the sale of the original asset into a specified asset within six months to qualify for the exemption.
  3. Exemption Calculation: The exemption is proportional to the amount reinvested. If the entire net consideration is reinvested, the entire capital gain is exempt. If only a portion is reinvested, the exemption is calculated using a formula.
  4. Clawback Provision: If the new asset is sold or converted into money within three years, the previously exempted capital gains will be taxed in the year of such sale or conversion.

Practical Implications: ​

  1. For NRIs: This section incentivizes NRIs to reinvest their capital gains from foreign exchange assets into specified assets, reducing their tax liability.
  2. Tax Planning: NRIs must carefully plan the reinvestment of proceeds to maximize tax benefits. Failure to reinvest within six months or selling the new asset within three years could result in tax liability.
  3. Compliance Burden: NRIs must maintain proper documentation of the sale, reinvestment, and holding period of the new asset to claim the exemption and avoid penalties.

Critical Concepts: ​

  1. Foreign Exchange Asset: Assets like shares, debentures, or deposits held in foreign currency by NRIs.
  2. Specified Asset: Assets defined under the law (e.g., deposits under Section 212(e)(iii)(v)) where the reinvestment can be made.
  3. Net Consideration: The sale proceeds of the original asset minus any expenses directly related to the transfer.
  4. Exemption Formula:
    • If the cost of the new asset is less than the net consideration, the exempted capital gain is calculated as: [ \text{Exempted Capital Gain} = \frac{\text{Total Capital Gain} \times \text{Cost of New Asset}}{\text{Net Consideration}} ]
  5. Clawback Rule: If the new asset is sold or converted into money within three years, the previously exempted capital gains will be taxed in the year of such sale or conversion.

Compliance Steps: ​

  1. Document the Sale: Maintain records of the sale of the original foreign exchange asset, including the sale price and any related expenses.
  2. Reinvest Within Six Months: Ensure the reinvestment into the specified asset is completed within six months of the sale.
  3. Calculate Exemption: Use the formula to determine the exempted capital gain if only a portion of the net consideration is reinvested.
  4. Hold the New Asset: Avoid selling or converting the new asset into money for at least three years to prevent the clawback of the exemption.
  5. File Returns Accurately: Report the capital gains and exemption correctly in the income tax return, along with supporting documentation.

Examples: ​

  1. Full Reinvestment:

    • An NRI sells a foreign exchange asset for ₹1 crore (net consideration). The capital gain is ₹30 lakh. They reinvest the entire ₹1 crore into a specified asset within six months. The entire ₹30 lakh capital gain is exempt from tax.

  2. Partial Reinvestment:

    • An NRI sells a foreign exchange asset for ₹1 crore (net consideration). The capital gain is ₹30 lakh. They reinvest ₹60 lakh into a specified asset within six months. The exempted capital gain is calculated as: [ \text{Exempted Capital Gain} = \frac{30,00,000 \times 60,00,000}{1,00,00,000} = 18,00,000 ]
    • ₹18 lakh is exempt, and ₹12 lakh is taxable.

  3. Clawback Scenario:

    • An NRI reinvests ₹1 crore into a specified asset and claims an exemption on ₹30 lakh capital gain. However, they sell the new asset after two years. The ₹30 lakh previously exempted will now be taxed as capital gains in the year of sale.