Non-residents investing in shares and securities in India have to compulsorily file income tax return

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In the recent past we have seen from the reports that people living outside India have started sending their money in India and have started investing their savings in Indian shares and securities market.

The simple reason for seeing such a move is better returns on fund in India.

We all know that non-residents irrespective of their age have one slab rate for payment of taxes in India which is as under:

On the above tax rate applicable surcharge and cess are also applicable.

Non-resident’s are also eligible to claim benefit of lower tax rate under the new tax regime u/s 115BAC which is as under:

Surcharge and cess are also applicable on above mentioned tax rate.

Please note that the above tax rates are applicable for income earned in FY 2023-24 and onwards as before that there was a different tax rate under the new regime of section 115BAC of the Income Tax Act.

However, the income that we are talking here is capital gain income earned by way of investing in equity shares listed in India for which firstly the non-resident would need to open a D-mat account in India.

Under the Income Tax Act there are different special sections for taxing Long term capital gain and short term capital gain from listed equity shares. Before going ahead to the taxation of long term and short term capital gain from shares let’s first understand when does a equity share becomes long term or short term.

Section 2 of Income Tax defines long term capital asset and short term capital asset. In relation to equity shares listed on stock exchange in India on which STT is paid it has been mentioned as under:

Short term: If held for 12 months or less.

Long term: If held for more than 12 months.

Once we have decided whether the share is a long term capital asset or short term capital let’s decide on the taxability of such capital gain earned by assessee which is as under:

Taxability of normal individual shareholder won’t be covered under section 115AD of the Act as that section talks about foreign institutional investor and for a person to become Foreign institutional investor they need to be registered as such with SEBI.

Hence, taxability of normal individuals would be covered under section 111A and 112A for listed equity shares on which STT is paid like other normal resident investors.

Accordingly, the taxability will be as under:

Short term capital gain on listed shares would be as per section 111A of the Income tax Act: 15%+applicable surcharge and cess.

Long term capital gain on listed shares would be as per section 112A of the Income tax Act: 10%+applicable surcharge and cess.

However, no tax needs to be paid for long term capital gain upto Rs. 1 lakh as per section 112A of the Income tax act but such Rs. 1 lakh would be a part of total income of assessee.

Now let’s discuss the interesting part which lead to the title of this post that if a non-resident invest any amount in share market and earns any amount of income he needs to file income tax return.

As per Section 139, an individual is not required to file income tax return if his or her total income does not exceed maximum amount not chargeable to tax.

Generally, it is the basic exemption limit of Rs. 2.5 lakh in case of individual but in case of non-resident individuals there is a difference.

If you read Section 111A and 112A you will find a difference in the treatment on resident individual and non-resident individual. Let’s discuss the same:

“Provided that in the case of an individual or a Hindu undivided family, being a resident, where the total income as reduced by such short-term capital gains is below the maximum amount which is not chargeable to income-tax, then, such short-term capital gains shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax”

Above proviso is from Section 111A of the Act and similar language is used in section 112A wherein it states that if total income of resident assessee excluding capital gain income falls short of basic exemption limit or maximum amount not chargeable to tax then such capital gain shall also be reduced from the remaining amount not chargeable to tax and then tax shall be calculated.

However, this benefit is not available to non-resident individuals.

What this means is if an individual non-resident even earn 1000 Rs. capital gain they will have to file income tax return because their income would be chargeable to tax u/s 111A as they won’t get any exemption limit benefit and accordingly as per Section 139 of the Act, for non-resident maximum amount not chargeable to tax would be Rs. 0.

Hence, if a non-resident earns any income from equity share trading during the year he will have to file income tax return as his income would be chargeable to tax. The only situation where non-resident might not have to file income tax return if the non-resident has only earned long term capital gain and total long term capital gain is below Rs. 1 lakh.

If a non-resident won’t file income tax return he will have to file income tax return along with late fees u/s 234F which can range anywhere between Rs. 1000 to Rs. 5000 depending on total income of assessee.

To read more about late fees CLICK HERE: Penalty u/s 234F for late filing of income tax return along with some disadvantages – Taxontips.

Please note that the exemption available u/s 115A and 115G for non-filing of income tax return to non-resident, is not available if they are earning income from capital gain.

Hence, filing of income tax return is compulsory for capital gain income.

Guidance on above article for Indian Income Tax by:

Naman Maloo (C.A., B.Com)
He is currently working as Partner – Direct Tax with a renowned firm in Jaipur having experience in dealing Assessments before Income Tax authority, Tax Audit, International Taxation, Tax planning for NRI, Business planning and consultation.
E-mail: naman.maloo@jainshrimal.in | LinkedIn: Naman Maloo

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