An investor, who has been living in Hong Kong for the past decade, is planning to sell his Gold Exchange-Traded Fund (ETF) holdings in India. Having held the investment for over three years, he seeks clarity on the tax implications of the sale, especially given his non-resident status and a bearish outlook on gold prices.
Tax Status and Capital Gains Classification
Since the individual has resided outside India for the last 10 years, he is classified as a non-resident under the Income Tax Act, 1961. A Gold ETF is considered a 'security' and thus a capital asset. Profits from its sale are taxable as capital gains.
The nature of the gain—short-term or long-term—depends on the holding period. For listed securities like Gold ETFs, an asset held for more than 12 months qualifies as a long-term capital asset. Consequently, the sale will result in Long-Term Capital Gains (LTCG).
Applicable Tax Rate and Exemption Rules
LTCG from the transfer of such assets is taxable at a rate of 12.5%, plus applicable surcharge and health and education cess. A critical point for investors is that the standard exemption of ₹1,25,000 available for LTCG is not applicable to Gold ETFs.
This exemption is restricted solely to gains from listed equity shares and units of equity-oriented mutual funds. Since a Gold ETF is not an equity-oriented instrument, the entire gain will be subject to tax at the prescribed rate.
Impact of India-Hong Kong Tax Treaty
Given the investor's status as a non-resident, the provisions of the India-Hong Kong Double Taxation Avoidance Agreement (DTAA) become relevant. Article 14 of this treaty governs the taxation of capital gains.
The treaty grants taxing rights to both jurisdictions for gains from such asset transfers. However, it does not provide any exclusive exemption or a concessional tax rate for gains arising from the sale of a Gold ETF. Therefore, the LTCG will remain fully taxable in India.
In summary, the investor must prepare to pay tax on the entire long-term capital gain at 12.5%, along with cess, with no basic exemption benefit. The tax liability arises in India, and the DTAA does not offer relief in this specific scenario. The analysis is provided by Harshal Bhuta, a partner at P. R. Bhuta & Co. Chartered Accountants.
