The taxman cometh… year after year! But do you know how much tax you pay on your investments in India? Or how capital gains are calculated under the tax laws in India? What are the circumstances under which you are exempt from paying capital gains tax? Get the lowdown here.
Capital gains: what it means
Just as you understand the investment options for NRIs in India, it is equally important to know the relevant tax implications. Capital gains are related to capital assets. Whether it would be categorized as long-term or short-term gain depends on the tenure for which you hold the investment. For investments in shares, debentures, mutual funds, bonds or UTI units, the capital gain is a short-term gain if the asset is held for not more than 12 months. In case of other capital assets like jewelry, paintings or immovable property, the asset should be possessed for not more than 36 months from the date of its acquisition to qualify for a short-term capital gain. Capital gains from assets held for longer periods are categorized as long-term capital gains.
Capital gains tax explained
Capital gains are differentiated as long term and short term since they are taxed at different rates and treated differently under the tax laws. Net short-term capital gains are added to gross income and are taxed at the normal tax rates applicable. A flat rate applies to all long-term capital gains. Special tax rates apply to NRIs for capital gains on investments in Euro issues or Global Depository Receipts (GDRs).
Exemptions for NRIs
Tax planning is an important aspect of earning from investments. When you consider investing in capital assets in India, it’s worth factoring in the following exemptions:
Long-term capital gains from the sale of equity shares and equity-oriented mutual funds are exempt under the tax laws in India.
You could also be exempted from long-term capital gains tax if you re-invest the net sale consideration or amount of capital gain into specified capital assets. A thorough study of the detailed tax provision is advisable before you claim this exemption.
Provision to set off capital gains against losses
A capital loss on the sale of shares can be set off against capital gains from other shares sold later on but within the same financial year. There are certain formalities that you will have to fulfill to avail this benefit - before the capital gains transaction, NRIs have to apply for a Tax Exemption Certificate. The capital loss that exceeds the capital gains amount and is not entirely set off can be carried forward and adjusted into the next financial year.
Do you know the applicable tax provisions for investing in India? How do you plan your investments to minimize your tax liability? Share your tips right here.
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