NRI Taxpayer Seeks Clarity on LTCG Exemption Reversal for Early Share Sale
An Non-Resident Indian (NRI) based in the United Arab Emirates (UAE) has raised a critical tax query regarding the long-term capital gains (LTCG) exemption claimed under special provisions for NRIs. During the financial year 2023–24, the individual availed of the benefit on LTCG from shares acquired through convertible foreign exchange, reinvesting the proceeds into new shares to qualify for the tax exemption.
Understanding the Three-Year Lock-In Requirement for NRI Tax Benefits
The taxpayer is aware of the mandatory condition that requires holding the newly acquired shares for a minimum period of three years to maintain the LTCG exemption. However, due to unforeseen circumstances, the shares are slated to be sold off in February 2026, which falls short of the full lock-in duration. This situation has sparked confusion over whether the exemption granted in FY 2023–24 will be reversed retrospectively or if the tax liability will apply in the subsequent financial year.
Decoding Section 115F of the Income Tax Act for NRIs
This scenario pertains directly to Section 115F of the Income Tax Act, 1961, a provision specifically designed for NRIs. Introduced to encourage the reinvestment of long-term capital gains into eligible assets, this section offers conditional tax relief. The relief is contingent upon strict adherence to rules, including a prescribed lock-in period and compliance with tax reporting requirements. The primary objective is to foster investment continuity while ensuring tax compliance.
Implications of Selling Assets Before the Lock-In Period Expires
Under Section 115F, if the new asset acquired for claiming the capital gains exemption is sold or converted into money within three years from the acquisition date, the previously availed exemption must be reversed. In such cases, the exempted capital gains amount is deemed as long-term capital gains and becomes taxable in the financial year when the new asset is sold or liquidated.
Tax Liability Timeline: No Need for Updated Return in FY 2023–24
Importantly, there is no requirement to file an updated return for FY 2023–24, which would otherwise attract a 25% additional tax. Instead, the withdrawn exemption will be taxable in the year of sale of the new asset. For this NRI taxpayer, since the sale is planned for February 2026, the tax liability will arise in FY 2025–26, aligning with the provisions of the Income Tax Act.
Expert Insight on NRI Tax Compliance and Planning
Harshal Bhuta, Partner at P. R. Bhuta & Co. CAs, emphasizes the importance of understanding these nuances for effective tax planning. NRIs must carefully evaluate their investment horizons and potential early exit scenarios to avoid unexpected tax reversals. Proper planning can help mitigate risks and ensure compliance with Indian tax laws, safeguarding financial interests.
This clarification provides much-needed guidance for NRIs navigating complex tax landscapes, ensuring they are well-informed about their obligations and can make strategic decisions regarding their investments.
