The transaction of transfer of shares between two NRIs attracts the provisions of certain acts, such as-
As per Foreign Exchange Management Act, 1999 (FEMA)
Regulation 9(2)(ii) of FEMA (Transfer or issue of security by a person resident outside India) Regulations, 2000 read along with Regulation 8(B)(I)(b) of the Master Circular on FDI in India (2015-2016) grants a general permission for transfer of shares or debentures of an Indian company from one NRI to another.
(Note: In case of transfer of shares from NRI(Non-Resident Indian) to NR(Non-Resident), prior approval of RBI is required)
However, it is to be ensured that the FDI sectoral cap as prescribed by the FDI policy is not breached. Also, there are no reporting guidelines specified by RBI in this regard.
As per Companies Act, 2013
Although no reporting requirements have been laid down by RBI, Section 56 of the Act has to be complied with. Either the transferor or the transferee must, in order to effectuate the share transfer, deliver the Share transfer form (SH-4) duly stamped, dated and executed within 60 days of the date of execution along with the share certificate to enable the Company to do the needful and update the Register of Members.
As per Stamp Act, 1899
Section 21 of the Indian Stamp Act provides for payment of duty in accordance with Article 62 of Schedule 1, on the transfer of shares(with or without consideration) in an incorporated company or other body corporate at a rate of 25 paise for every Rs.100 or part thereof of the value of the share.
As per Income Tax Act, 1961
As per Sec. section 9(1)(i)(d) of the Act, any income accruing or arising, whether directly or indirectly, through the transfer of a capital asset situated in India is deemed to accrue or arise in India.
Hence, capital gains from sale of shares of an Indian company are taxable in the hands of an NRI.
The tax to be deducted at source by NRI shall be treated as Withholding tax and a certificate has to be obtained from the Assessing officer.
NRIs are not eligible for Indexation benefits and deductions, however, they can avail the benefits from DTAA(Double Taxation Avoidance Agreement).
Under DTAA, there are two methods to claim tax relief – exemption method and tax credit method.
In exemption method, NRIs are taxed in only one country and exempted in another. In tax credit method, where the income is taxed in both countries, tax relief can be claimed in the country of residence.
A special provision exempts NRIs from filing a tax return, if their sources of income from India only include investment income and LTCG(Long Term Capital Gains).