When I was a resident of India, I made a seed investment in a friend’s private limited company in the country in late 2019. Just before the covid-19 pandemic, I shifted to Singapore for work and have been residing there since. In early 2022, I purchased additional shares from a non-resident investor and paid her from my Singaporean bank account. I am now selling these shares back to my promoter friend. Would the taxability be different for both lots of shares?
–Name withheld on request
Since you relocated to Singapore to take up work and continue to reside there, I assume that you currently qualify as a non-resident in India under both the Income Tax Act, 1961, and the Foreign Exchange Management Act, 1999.
It is important to note that your residential status at the time of acquiring the shares (whether resident or non-resident) is not relevant for determining the tax implications on capital gains. Instead, what is material is your residential status at the time of sale of the shares.
Since you will qualify as a non-resident at the time of the intended sale, the taxability of the capital gains will be determined accordingly. Under Indian tax law, the holding period determines the nature of capital gains. For unlisted shares, a holding period of more than 24 months qualifies the gains as long-term capital gains (LTCG).
In your case, since you have held the shares of an Indian company for more than 24 months, your gains will be considered as LTCG and will be taxed at 12.5% (plus applicable surcharge and cess) under the Indian tax law. Note that the indexation benefit will not be available.
Additionally, under the India-Singapore Double Taxation Avoidance Agreement, India has the primary right to tax capital gains arising from the sale of shares in an Indian company. The treaty does not grant Singapore an exemption or exclusive taxing rights.
Accordingly, LTCGs will be taxed at 12.5% (plus applicable surcharge and cess). Even if these LTCGs constitute your sole source of income in India, and even though the purchaser may be obligated to deduct tax at source when crediting the sale proceeds to you, you will still be required to file an income tax return in India. This is because only the subsequent investment made by you would qualify as an investment made into a foreign exchange asset.
As per Indian foreign exchange regulations, the initial investment made while you were a resident in India will be classified as a non-repatriable investment. In contrast, the subsequent investment, made after becoming a non-resident of India, will be treated as a repatriable investment. Accordingly, the entire sale proceeds relating to the repatriable investment will be permitted to be freely remitted to your foreign bank account in Singapore. However, the proceeds from the non-repatriable investment must first be credited to your non-resident ordinary account in India, and can then be repatriated to your Singapore account up to $1 million per fiscal year.
Harshal Bhuta is a partner at P. R. Bhuta & Co. Chartered Accountants.