A General Discussion of the Taxation of Capital Gains for the purposes of Non Residents Assessee when they transfer the debt Securities specially bonds and Debentures held by them. This discussion is presented using FAQs Technique
The Following Chain of Section will be most relevant for the purposes of calculating the Capital Gains from the transfer of Bonds and Debentures.
Apart from the below mentioned Section , there are certain benefits also to the non residents from the transfer of certain Bonds and Debentures , conversion benefits and other Benefits which is not discussed in this article.
Section 48+ 1st proviso to section 48 Read with Rule 115A+ 2nd, 3rd, 4th,5th and 7th Proviso to Section 48+ Section 111A+ Section 112 + First Proviso to Section 112 + Section 2(42A)+ Section + Section 74 and Section 80 + Section 139(3)
Let’s make an analysis of the above mentioned Sections in a chronological order Through FAQs–
1) What is Section 48 of the income tax act , 1961 , whether it is a charging section of the head Capital Gains and if not , then what’s the difference between section 45 and section 48 ?
Ans: This section dealt with the manner of computation of income which is chargeable under the head Capital Gains. This section have mainly three parts ….
The Sales Consideration from transfer of a capital assets which shall be reduced by the Cost of Acquisition of the assets followed by Cost of improvement and other ancillary expenditures related to the transfer of capital assets.
One must not hold any doubt , that it’s a charging section.
First, their must be a capital assets u/s 2(14),
then their must be a transfer that should take place in accordance with Section 2(47)
When both the requirements are fulfilled , then only the question of applying the provisions of 48 shall arise.
2) Explain the Applicability of 1st Proviso to Section 48 of the Act ?
Ans: This Proviso modified the Format of Section 48 only for the limited purposes of Non Residents.
It means it’s solely applicable on the Non Residents.
If the non residents subscribed the bonds and Debentures of “Indian company” in ” Foreign Currencies”, then it is mandatory to them to apply 1st Proviso to Section 48.
The manner of computation of sales consideration, Cost of Acquisition and cost of improvements shall be dealt in accordance with Rule 115A.
3) whether Non Residents included Foreign institutional investors also, for the purposes of 1st Proviso to Section 48 ?
Ans: Yes, all Non Residents are Covered.
4) Whether it is optional for non Residents to opt for 1st proviso if his case falls under 1st proviso?
Ans: No, it is the mandatory for every non residents provided his cases is fall under the 1st proviso to Section 48.
5) Whether a non residents subscribed the Bonds and Debentures of indian company in Indian currencies, then whether the 1st proviso is apply ? And if not , then How to calculate the capital gains in such a case ?
Ans: The 1st proviso of Section 48 shall apply only when the Securities are purchased in Foreign Currencies by the non residents .
Hence in such a case, the 1st proviso shall not apply.
The capital gains shall be calculated generally using the method of computation given in main part of Section 48.
6) If a indian Residents subscribed the bonds and Debentures of indian listed company in Foreign Currencies, then whether he can opt for the benefits of 1st proviso to Section 48 ?
Ans: straight Forward No, since the benefits under 1st Proviso shall only applicable to the Non Residents Assessee and not apply to Residents Assessee.
7) Non Residents subscribed the bonds and Debentures of Indian private limited Companies in Foreign Currencies, whether he can take the benefits of 1st proviso to Section 48 ?
Ans: yes, his case is fall under the mandatory 1st proviso to Section 48. What is to seen is that the Shares and Debentures which includes bonds also must be of Indian Companies whether listed / Unlisted .
8) Bonds issued by the Government of India and subsequently subscribed by the non residents in Foreign Currencies, whether he can opt for the benefits of 1st proviso is
Ans: No , only the Shares, bonds and Debentures of the Indian ” Companies ” are Covered .
Hence the bonds which are issued by the Government of India is not covered.
9) Non Residents Assessee Subscribed the bonds and Debentures of the Government Companies in Foreign Currencies. Whether it is Covered under the 1st proviso to Section 48 of the “Act ?
Ans: Yes, the Benefits will be available , since what is to be seen that bonds and Debentures must be of any indian ” companies”
10) Whether it is applicable only on long term capital gains ?
Ans: There is no such restrictions put in the 1st proviso to Section 48. Hence , it will be applicable on both short term and long term capital gains.
11) Whether the First proviso to Section 48 will also equally applicable on units of mutual funds , units of business trusts etc ?
Ans: No , only the shares and Debentures of the Indian Companies are Covered and not the units of mutual funds and business trusts are Covered.
12) Since, we are talking about benefits of 1st Proviso to section 48. But how this benefits is calculated ?
Ans: The Benefits under 1st proviso shall be calculated by using Rule 115A as follows –
1) The sales consideration and Expenses in connection with the transfer (which is in Indian Rupees) shall be converted into that currencies which was firstly used at the time of making investment, by taking the average of TTBR and the TTSR Rates “on the date of transfer”.
2) on the similar note, the cost of Acquisition shall also be converted using the Average rate ” on the day of Acquisition “
3) The resultant capital gains if any, shall be converted using TTBR Rate on the date of transfer.
For Example –
Mr John invested in foreign currency in Indian bonds and Debentures – in ($)
Sales consideration is 12,00,000 on 31/03/2020*
Cost of Acquisition is 7,50,000 on 01/04/2017
Expenses in transfer is 1,5,0000 on 28/03/2020*
Other information :-
1) On 31/03/2020 – Average rate is Rs 60/$
2) On 01/04/2017 – Average Rate is Rs 50/$
3) On 28/03/2020 – Average Rate is Rs 55/$
4) on 31/03/2020 – TTBR is Rs 62/$
Calculate capital gains to be taxed –
Ans – Since it is the case of Non Residents , who had invested in Indian bonds and Debentures in foreign Currencies.
Hence , 1st proviso to Section 48 shall be mandatarily apply.
We have to Convert the sales consideration and Expenses in transfer using
the average of TTBR and TTSR Rates on the date of transfer i.e. on 31/03/2020 which is Rs 60/$.
The rate given on 28/03/2020 is if no use.
Since, only the date of sales shall be considered.
Sales Consideration ($) – 20,000
Expenses on Transfer ($) – 6
Hence Net Sales Consideration is 19,994 $
Further the Cost of Acquisition shall be converted at the Rate of Rs 50/$ on the date of Acquisition.
Hence , the Cost of Acquisition shall be 15000$ ( i.e. Rs 7,50,000/50)
Hence capital gains shall be $ 4,994 .
This $ 4,994 shall be converted using TTBR rates on 31/03/2020 i.e. Rs 62/$ .
Hence , total Capital Gains Shall be Rs 3,09,628/-
This capital gains shall be taxes in accordance with Section 112.
13) Suppose, in the above example, if there is a net loss of 5,000 INR after applying the First Proviso to section 48 read with 115A, then what will be the role of Section 112 ?
Ans: The very first prior requisite to apply the rates Section is that there must be some gain after applying the first proviso.
It means if after applying the First proviso , there is a gain, then only questions can arise of what should be the rates of Taxation.
However if after applying the 1st proviso , there is a loss , then questions of applying the provisions of 112 can’t even come into existence.
This loss is a loss under the head Capital Gains and shall accordingly be dealt in accordance with chapter VI of the “Act.
14) Suppose, The above Assessee didn’t file the ROI, and
Suppose it is a loss of Rs 5000 which is a long term capital loss as calculated, and Assessee have following other information –
Short term capital gains (CY) – 10,000
Other Long term capital gains (CY) – 2,000
The Assessee filled it’s return us 139(4) i.e. beyond the due date of ROI
What will be the treatment of the loss ?
Ans: This Loss of Rs 5000 is a loss from long term capital assets.
Hence , now the provisions of chapter VI comes into play – Relevant aspects are –
✔️Long term capital loss shall not be set off against short term capital gains U/s 70.
Hence , this losses can’t be set off against the STCG of Rs 10,000.
✔️ Long term capital Loss of 5,000 can be set off against Long term capital gains of Rs 2,000 to the Extent of Rs 2,000/-
✔️ The Balance of the loss of Rs 3,000 shall be carried forward if conditions of Section 80 is satisfied.
However , since the Assessee filled the ROI after due date i.e. us 139(4) , hence the Loss under the head Capital Gains Shall not be carried forward , since as per Section 80,
No loss under the head Capital Gains Shall be carried forward to the next year’s until the ROI of the current year is furnished within due date mentioned us 139(1).
However, there is no restrictions of set off of losses
That’s why the losses of 5,000 to the Extent of Rs 2,000 are eligible to set off.
15) If the case of Non Residents falls under the 1st proviso to Section 48, whether indexation benefits mentioned under 2nd proviso is applicable ?
Ans: No, since in 1st proviso it is mentioned that where the case of Non Residents falls under the 1st proviso he can’t opt for 2nd proviso. means indexation benefits not available .
16) The Fourth proviso to Section 48, said that indexation benefits shall be applicable only on Capital indexed bonds and Sovereign Gold bonds , Not on any other bonds and Debentures.
It means is it correct to say, that if the non residents applied for these bonds, in foreign currencies, then he is eligible for indexation benefits ?
Ans: Yes, since the capital indexed bonds are issued by the Government of India not by any Indian Companies.
Further , Sovereign Gold Bonds are issued by the Reserve Bank of India and not By Indian Companies.
Since, the Benefits of the first proviso shall be applicable only on the bonds and Debentures which are issued by the Indian Companies . And these bonds are not issued by Indian Companies.
Hence, the mandatory Proviso of Section 48 shall not apply here.
And Hence the Door of indexation benefits prescribed in the 2nd proviso to section 48 read with 4th proviso to section 48 shall now be available.
And yes , non residents can take benefits of indexation on Capital indexed bonds and Sovereign Gold bonds .
17) If Non Residents Mr X Purchased the capital indexed bonds in Indian National Rupees , then whether the indexation benefits will be available ?
Ans: Yes, since there is no restrictions in 4th proviso that investments must be made in foreign currencies . Hence indexation benefits will be available.
18) What is 3rd Proviso to Section 48 of the Act ?
Ans: The 3rd Proviso said that Benefits of Section 112A on long term Capital Gains Shall be calculated without giving the effect of 1st and 2nd Proviso to section 48.
However, one have to very much clear that Section 112A shall not be applicable on bonds and Debentures . Hence , the 3rd proviso to section 48 have no relevance when we talk in context of bonds and Debentures.
19) Discuss the benefits given by 5th proviso to section 48 against the Rupee Denominated Bonds ?
Ans: The Entire Discussion on Rupee Denominated bonds is a special consideration.
Hence , I decided to Covered separately in upcoming articles.
20) Many of the Transactions of the Stock Exchanges are subject to Securities Transaction Taxes.
What will be The Treatment of that taxes while computing the capital gains us 48 ?
Ans: First of all, The Securities Transaction Taxes is not applicable on the Transactions of bonds and Securities.
Hence the question of allowances/ disallowance of the Securities Transaction Taxes while Computing the capital gains from the transfer of Bonds and Debentures Can not be arises.
Even , if the bonds and Debentures are subject to Securities Transaction Taxes,
then also the Seventh Proviso of Section 48 would be applicable, which disallow the claim of Securities Transaction Taxes while Computing the capital gains on any securities.
However, there is a single exception and that is if Securities Transaction Taxes paid on sales and purchases of Shares, and
the income from those shares is subjected to taxed us 28 under the head Profits and Gains From Business Professions,
then As per section 36, Assessee is allowed to claim the Deductions of Securities Transaction Taxes paid on purchases/sales of those shares .
But in the chapter of capital gains, it is straight away disallowed by virtue of Seventh Proviso to section 48 of income tax act , 1961.
21) What is the Period of holdings in case of bonds to be called as long term capital assets ? And what is the relevance of deciding that whether the assets is a long term capital assets or short term capital assets ?
Ans: The Relevance of deciding whether the particular securities Is a long term capital assets or short term capital assets is lying in the..
* Applicability of the Rates that should be applied
* If the losses occurred, what will be Treatment of losses.
* Other benefits under income Taxes act ,1961 . Like Exemption Series us 54 which are generally available on long term capital assets.
Government always wish to extend the taxation benefits to the long term capital assets as compared to short term.
The reasons behind these may be that investors relatively invest their money for a larger period of time and thus accordingly give more effective contributions towards nation building.
The Period of Holding us 2(42A) shall be 12 months or more to constitute whether the listed Debentures or Bonds is a long term capital Assets or Not.
And For Non Listed Debentures , the above period shall be Read as “36 Months ” to constitute whether it is a long term Capital Assets or Not.
22) if bonds and Debentures subscribed by nor Residents in foreign currencies ,
is a short term capital assets , then whether the benefits of concessional Rates of taxation us 111A shall be applicable or if not then discuss the chronology of taxation ?
Firstly , In no cases, the Provisions of Section 111A shall be applied to the bonds and Debentures.
Hence, the Concessional Rates of Taxation us 111A @ 15 % shall not be applied.
Chronology of taxation of short term capital assets being Bonds and Debentures through Illustrations given as follows..
1) Mr X buys Four Securities on 01/04/2019 and sold on 20/09/2019.
* Listed bonds of X ltd @ 10 % in foreign currencies
* Unlisted debentures (Y ltd ) – @ 8 % in Foreign currencies
* Listed Securities of A Ltd – @ 6 % in Indian Currencies
* Unlisted Securities of B Ltd – @ 4 % in indian currencies
The Relevant Aspects are as Follows –
* All the Securities given is short term capital assets.
* The Interest income shall be taxable @ 5 % with respect to Securities of X Ltd and Y Ltd
provided other conditions of Section 115A is fulfilled.
* The Interest income from A Ltd and B Ltd shall be taxable normally since they are not acquired in foreign currencies and accordingly the benefits of concessional Rates of taxation shall not be applicable.
* Now, when these Debentures and bonds are sold, the provisions of capital gains come into play.
* The benefits of 1st proviso shall be apply only on Securities X Limited and Y limited and not on securities of A limited and B limited since they are acquired using INR.
* Even the benefits of indexation will not be available to the securities of A limited and B limited because of two reasons …
First it is bond and Debentures and
the secondly it is not a long term capital assets.
* Hence , for Securities A limited and B limited , normal provisions of Section 48 apply. And For X ltd and Y ltd benefits of 1st proviso shall be given.
Now for X Limited and Y limited securities::
* If after applying the first proviso to 48, there is a loss , then such losses shall be treated in accordance with Section 70/71/74/80.
* If after applying the 1st proviso to section 48, there is a gain. then Section 111A shall not apply. Since , it is not applied on Bonds and Debentures.
* If after applying the 1st proviso to section 48, and there is gain on sales of such securities, and if it is a Foreign Companies it shall be taxable @ 40 % flat. Applicable to Foreign Companies.
* If after applying the 1st provisos to section 48, and there is gain on sales of such securities, and if it is a Foreign institutional investors and the case is fall under the categories of Section 115AD, then it shall be taxable @ 30 %, otherwise it shall be taxed Normally as applicable.
* For other Assessee , it shall taxes as per their relevant tax brackets applicable on them after applying the 1st proviso to Section 48 of the Act.
23) If unlisted Bonds and Debentures which are Subscribed by the non residents in Foreign Currencies , and There is a Long Term Capital Losses after applying the 1st Proviso to section 48 , then what is the treatment of Such losses ?
Ans: If after applying the First proviso to Section 48, and there is losses , then this losses shall be governed by Section 70/71/74/80. And the provisions of section 112 can’t be apply since it’s a losses cases.
If Return of income filled within Due date, then so much of the losses which are left after making the adjustments of Section 70 and Section 71 shall be allowed to be carried forward in accordance with Section 74 of the Act.
Mr.X (NRI) having following income Under the head Capital Gains after applying the 1st proviso to Section 48.( Means all the Securities shall acquired in Foreign Currencies)
1) Long term Capital Losses
(Bonds A) – Rs 4,00,000
2) Short Term Capital Gains
(Bond B) – Rs 1,50,000
3) Long term Capital Gains
(from Sales of land ) – Rs 2,50,000
4) Short Term Capital Losses –
(Bond C) – Rs 1,00,000
5) Normal Business Loss – Rs 50,000
Present the Solution –
Case A – If ROI filled within Due Date
Case B – If ROI not Filled within
Due Date .
Relevant Provision –
1) Long term capital Loss can only be allowed to set off against Long term capital gains and not against short term capital gains. ( Section 70)
Hence, loss from Sales of Bond A can be adjusted with Long term capital gains of sales of land to the Extent of 2,50,000.
Still, there is a loss of 1,50,000 which can’t be set off against any other income.
Since no other Long term capital gains is left. Hence it had to be carried forward provided the ROI is filled within the due date us 139(1).
2) Short term Capital Gains can be set off against both short term capital gains and losses.
Hence, after making the set off we left with gains of short term to the Extent of Rs 50,000.
The restrictions of Section 71 with respect to inter head adjustments shall only apply to losses under the head Capital Gains to be set off against other heads.
However, we are not setting off the losses of capital gains, instead we are setting off the losses of business head against the income of capital gains head. Hence , the net result shall be as follows –
✔️ Long term capital Loss of Rs 1,50,000
✔️ Short Term Capital Gains – Nil
✔️ Income under the P/G/B/P – Nil
However if the Return of income is filled within Due Date , then only this losses shall be allowed to be carried forward.
Otherwise losses shall be lapsed , provided the Assessee didn’t move application to concerned authorities to condone the delay in filling of return of income as per circular no 09/2015.
24) If unlisted Bonds and Debentures which are Subscribed by the non residents in Foreign Currencies , and There is a Long Term Capital Gains after applying the 1st Proviso to section 48 , then what is the treatment of Such Gains ?
Ans: lets understand Through an comprehensive Example ::
1) Cost of Acquisition acquired on 01/04/2017 – unlisted Bonds of A private limited in $ – Rs 8,00,000/-
2) Sales Consideration on 31/03/2020 – Rs 16,00,000/-
3) Long term Capital loss on sales of Land – Rs 80,000/-
4) Short Term Capital Gains u/s 50 from the sales of machinery – 3,60,000/-
5) Long Term Capital loss on sales of Shares – not being subject to 112A – Rs 3,00,000/-
6) Long term capital losses subject to 112A – calculated – Rs 60,000/-
7) Long term Capital Gains from Sales of land – Rs 7,40,000/-
8) Short Term Capital Loss from Sales of Shares us 111A – 7,70,000/-
9) Bought Forward Long term capital loss is Rs 1,20,000.
Compute the Tax liability for the maximum benefit of Non Residents Assessee , consider the effective average Exchange Rate is Rs 50/$ keeping in mind that ROI of current year is filled after the Due Date.
Ans: We have to make such a calculation in accordance with the law in which the tax liabilities of the Assessee becomes most favourable.
However, 1st of all I want to explain the provisions of section 112..
* The Provisions of Section 112 is the section which deals with the rate of LTCG.
* It is applicable only when after applying the complete implications of Section 48, be it 1st proviso or other, and there is a gain , then Section 112 comes into play.
* If a non residents who purchased the unlisted Securities in foreign currencies , then 1st proviso shall be apply. And if there is a gain, then while calculating the Tax liability , we should completely forgot about 1st proviso to Section 48.
* Then Tax shall be applicable @ 10 percent of Long term capital gains which is calculated without giving the effect of 1st proviso to Section 48.
* One may think , what about the applicability of 2nd proviso.. since as soon as we apply section 112, the 1st proviso application had faded away.
Now, can we now, apply , the 2nd proviso ie indexation ?
Answer is straight away No, since it’s the cases of bonds and Debentures indexation is not available. This is clarify at 2 places .
One in Section 112 and other place is 2nd proviso to 48 which prohibits indexation on bonds and Debentures.
* Hence, to sum up one liner statement is sufficient that is
” if the non residents Indian subscribed the unlisted bonds and debenture and even unlisted shares also and there is a gain after applying the Complete implications of Section 48 wherever apply,
then the tax shall be Flat
= 10 % of (sales price – COA)
* Other Long term capital gains shall normally be charged us 112 i.e.
@ 20 %.
* However For Non Residents individual there is also a special chapter called XII A
( to be Discussed later On )
* Slab Benefits shall not be applicable in the case of Non Residents having Income taxable under Long Term capital gains us 112.
* Short Term Capital Gains us 111A shall be chargeable @ 15% .
* Rebate us 87A shall not be applicable to Non Residents Individual.
* After the introduction of Section 112A , the losses under Section 112A can be adjust against the other Long term capital gains and Vice – a – Versa, in accordance with Section 70 to 80.
Summary of the above questions after applying the related provisions is as follows…
> Since, the Rate of Foreign exchange is same, and hence its hardly matter to convert them and apply 1st proviso to 48.
Hence, long term capital gains from Sales of Unlisted bonds and Debentures subscribed in Foreign Currencies shall be Rs 8,00,000 ( 16,00,000- 8,00,000) and this will be taxable @ 10 Percent after applying the provisions of chapter VI of the Act.
> other Long term capital gains shall be taxable @ 20 Percent.
However, before applying the Rate, the losses under the one source of long term capital assets shall have to be set off against other Long term capital gains.
Hence, after making the adjustments us 70 the Net Long term capital gains from (3+5+6+7) is Rs 3,00,000 taxable @ 20 %.
> Now, Come to point no 4 and 8, the net results will be a loss under the head Capital Gains to the extent of 4,10,000 which is a Short Term Capital Loss , Since short term capital loss can be adjusted against the Short Term as well as Long term capital gains us 70.
> Now, in point no 8, we have also a brought forward losses of Rs 1,20,000 which can be adjusted only against the long term capital gains in the current year.
One may thought that since the ROI of the current year is filled after the Due Date , this losses can’t be set off.
This is wrong interpretation, since it’s a ” Bought Forward losses” .
If the losses in the statement of taxable income , is showing as bought forward , it’s is very much obvious that’s it’s belong to earlier years and the ROI if the earlier year is filed within due date.
Hence, it’s doesn’t matter at all that ROI of current year filed after the Due Date.
And This losses of 1,20,000 is available for set off in current year.
> If we want to reduced the tax liabilities, firstly we have to target those incomes which have high tax rates .
Means if long term capital gains of 20% is reduced substantially, then Tax liability will be lower.
To make it more clear..
* Firstly I would like to set off entire losses with Rs 8,00,000 income, taxable @ 10 %..
Long term capital gains = 2,70,000 (8,00,000-4,10,000-1,20,000)
And this 2,70,000 shall be taxable @ 10% comes to 27,000.
* Long term capital gains of Rs 3,00,000 shall be taxable @ 20 percent comes to Rs 60,000.
Hence total tax liabilities comes to 87,000/- + 4 % Cess
* However, if we first set off short term capital losses with 20% slab LTCG.
* LTCG @ 20 % after adjustments = NIL
* Balance Short Term Capital Losses of 1,10,000 along with brought forward Long term capital loss of Rs 1,20,000 is available to be set off against Long term capital gains @ 10 percent .
Tax liability comes to =
10 % of ( 8,00,000-2,30,000) , which comes to 57,000 + 4 % cess.
Hence, just by changing the method of set off within purview of law, tax liabilities is reduced to 30,000 approximately . It’s called tax planning.
25) If unlisted Bonds and Debentures which are Subscribed by the non residents in Indian Currencies , and There is a losses, then what will be the treatment ?
Ans: Since, the bonds and debenture are subscribed in Indian Currencies , hence the benefits of 1st Proviso not applied. Neither the benefits of 2nd Proviso is not available since it’s a bonds and Debentures.
Since, this is the case of losses , Section 70/71/74/80 comes into play. Hence, no role of Section 112 is there.
26) keeping all other information as it is, if the above case is the case of gains , then what will be the tax treatment ?
Ans: The above case is the case of long term capital gains :-
However the benefits of 1st proviso is not available since Acquisition is not made in Foreign Currencies. Again the 2nd Proviso to 48 not available.
The tax shall be Flat 10% of ( sales price -COA) us 112.
Since , in Section 112 while applying the concessional Rates of taxes @10 percent, it is not mandatory that investments must be made in Foreign Currencies.
27) Can we make any one liner statement regarding the taxation of Unlisted bonds and Debentures subscribed by Non Residents ?
Ans: ” If any Non Residents , Subscribed any Bonds and Debentures which is unlisted Securities of indian companies, whether such assets is acquired in Foreign Currencies or in Indian national Rupees, and if applications of Section 48, there is –
✔️ Losses – always be treat in accordance with Section 70+71+74+80.
✔️Long term capital gains – Section 112 Applies and Tax shall be calculated flat @10 Percent of (Sales price – cost of Acquisition)
However, there is a special chapter for Non Residents Individual name chapter XII- A which shall be covered later by me.
28) If Non Residents assessees subscribed for Listed bonds and Debentures in Foreign Currencies, and If there is a loss after applying the provisions of section 48, what is the tax treatment ?
Ans: Such Losses shall be long term capital losses and shall be governed in accordance with section 70+71+74+80.
There is no role of Section 112 there. And such losses shall be carried forward Normally after applying the First proviso to Section 48.
29) If Non Residents assessees subscribed for Listed bonds and Debentures in Foreign Currencies, and If there is a Gain after applying the provisions of section 48, what is the tax treatment , Elaborate through an Illustration ?
NRI Mr X presented the following data , calculate it’s tax liabilities for the best of his benefits-
1) Investments in bonds of RIL in bonds and Debentures in Foreign Currencies –
* Cost of Acquisition – Rs 12,00,000/-
On 01/04/2018 , average Exchange Rate – Rs 50/$ on that date.
* Sales consideration – Rs 36,00,00/- on 31/03/2020 , average Exchange Rate on that date – Rs 60/$.
TTBR rate on 31/03/2020 – Rs 62/$
2) Short term capital Losses from Sales of Building us 50 – Rs 17,50,000/-
3) Long Term capital Gains from Sales of land – Rs 26,00,000/-
4) Brought Forward Long term capital Loss – 12,00,000/-
5) Return of the losses is filled in the current year after the due date.
6) Long term capital loss from Sales of Unlisted Bonds and Debentures subscribed in Foreign Currencies Rs 1,10,000/- ( calculated)
7) Short term capital loss us 111A is Rs 60,000 of current year.
8) Current year Loss under the head house property Rs 2,60,000/-
Ans: Relevant provisions –
* The 1st proviso to Section 48 read with Rule 115A shall apply on the bonds and Debentures of Reliance industries limited since it is subscribed in Foreign Currencies.
sales consideration ($) – 36,00,000/60
Comes to 60,000 $
Cost of Acquisition ($) – 12,00,000/50
Comes to 24,000 $
And hence ,
long term capital gains ($) – 36,000
In INR – 36000*62 Which Comes to INR 22,32,000/-
* The indexation benefits will not available to bonds and Debentures .
* Since, it is listed Securities ,and hence proviso to Section 112 shall be applied. The provisions related to unlisted Securities shall not be applicable
* As per the proviso to Section 112,
Long Term Capital gains on the sales of listed security in case of Non Residents shall be lower of –
a) 20% After applying the 1st proviso to Section 48
b) 10 % without indexation means without applying the 2nd proviso to Section 48.
Now, Come to the most interesting part of this Proviso. Consider the cases –
Case A – if Non residents subscribed bonds and Debentures in Foreign Currencies , which is listed , then he is subject to 1st proviso and 2nd proviso will not be apply since the case of the assessees falls under the 1st Proviso.
Case – B – If Non Residents Subscribed the listed bonds and Debentures in indian currencies , then 1st proviso is not applied, since investments made in indian currencies.
Now, one may think , is he eligible for indexation benefits ? The answer is No , since indexation itself not allowed on bonds and Debentures .
Combined effect of reading of Case A and B is that,
If a non residents acquired the listed bonds And Debentures , whether in Foreign/Indian Currencies, whatever the case may be, he is not eligible for at least the benefits of indexation.
Hence, when we read the proviso to Section 112 in the context of listed Securities being Bonds and debenture, the crux will be as follows –
> If it’s acquired in Foreign Currencies, then lower off –
1) 20% of long term capital gains after applying the First proviso
2) 10 % without applying the indexation. But it’s doesn’t restrict that 1st proviso can’t be applied.
Hence , it can be read as 10% after applying the First proviso to Section 48.
And the ultimate results ,
Which Comes to 10 % after applying the First proviso.
> If investments made in INR –
Then lower of –
1) 20 % after applying the First proviso..
Since , the 1st proviso to Section 48 not apply. Hence, it can be read as flat 20 Percent of (Sales Price – -COA)
2) 10 percent without indexation..
Since when it acquired in INR , both benefits is denied. Hence , it can also be read as 10% of (Sales price – COA)
And hence the ultimate results will be
= 10% of (sales price – COA)
* Total Short Term Capital Losses available = 18,10,000 i.e. ( 17,50,000+ 60,000) which can either be set off against other short term Capital gains or against Long term capital gains .
* long term capital loss from Sales of Unlisted Securities to the extent of Rs 1,10,000 in point no (6) and Brought Forward losses of be set off against Long term capital losses to the extent of 12,00,000 I’m point no (4) must be set off against the long term capital gains from Sales of land and building in point no (3) since it is subjected to Taxed @ 20% , on the other hand long term capital gains on sales of listed Securities shall be taxable @ 10% after applying the 1st proviso.
And Hence we have to target the higher Rates income in order the reduced the overall tax liabilities of the assessee.
After applying the above the long term capital Gains from Sales of Land shall be (26,00,000- 13,10,000) = 12,90,000/-
* Further there is also a short term capital gains of Rs 18,10,000 and it should again set off against the Long term Capital gains from Sales if land
And after applying the above we have –
✔️ Short Term Capital Losses – Nil.
✔️ Long term capital gains from Sales of land – Nil
✔️ Balance Short term capital gains is Rs 5,20,000/- which can be set off against long term capital gains from Sales of RIL bonds and Debentures of Rs *22,32,000/-
(Refer first * of this solution )
✔️ Apart from that Assessee also have a current year losses under House property to the tune of Rs 2,60,000/-
✔️ Return of the income is filled within due date mentioned us 139(1) of the income tax act , 1961
Hence, Long term capital gains from sales of bonds and Debentures of listed companies acquired in Foreign currencies shall be –
10% of ( 22,32,000-5,20,000-2,00,000*)
Which comes to Rs 1,51,200/- + 4 % education cess..
Note – The current year losses under the head house property can only be set off against other head of income in current year only to the Extent of Rs 2,00,000/- us 71 of the Act. And the balance loss of Rs 60,000 shall be carried forward.
Note – it’s hardly matter that Assessee doesn’t filled the Return of income with in due date us 139(1) or even he didn’t filed the ROI.
Since section 80 doesn’t make any reference to the losses us 71B which deals with carry forward of Losses of house property.
30) If Non Residents assessees subscribed for Listed bonds and Debentures in Indian Currencies, and and if there is a Gain after applying the provisions of Section 48 , what is the tax treatment ?
Ans: The solution of the shall be same as above except the Assessee will not be entitled for any benefits under 1st proviso to Section 48.
Means the tax rates shall be 10% of ( sales price – Cost of Acquisition)
Already Discussed in FAQs No 29/-
31) If Non Residents assessees subscribed for Listed bonds and Debentures in Indian Currencies, and If there is a losses after applying the provisions of section 48, what is the tax treatment ?
Ans: This losses shall be long term Capital Losses and shall be dealt in accordance with provisions of Section 70+71+74+80+139(3)+139(1)
32) If Non Residents Subscribed the capital indexed bonds, and we are aware from above discussion that such bonds are not eligible for the benefits of first proviso to Section 48, then what will be the tax Rates applicable for transfer of such bonds and Debentures when they are acquired in Foreign Currencies and when they are acquired in Indian national Currencies ?
Ans: Since these types of bonds and Debentures are eligible for indexation benefits.
Further these are neither unlisted Companies Securities , neither they are listed Securities.
Since, they are issued by the government of India.
Hence, they will normally be taxed @ 20% after applying the indexation benefits to the non residents in both cases when they are acquired in Foreign Currencies or indigenous currencies i.e. INR.
Disclaimer :- This article is for the purposes of information and shall not be treated as solicitation in any manner or of for any other purposes whatsoever. For the benefits of reader a short glimpse of provisions is presented in my personal language as per my capabilities. It shall not to be used for any legal advice /opinion and shall not to be used to rendering any professional opinion. Readers are advised to kindly go through to original government publications and published case laws and judicial pronouncements. Errors may creep in and hence it will be highly appreciable to highlight such errors or providing suggestions for effective improvements.