Foreign security majorly means the security in the form of shares or debentures or stocks or bonds or any other security instruments which are denominated or expressed in the form of foreign currency.
Investors can always invest in Indian securities, including foreign securities, so as to increase the diversity of their portfolio and maximize their returns by minimizing the chance for any loss by depending on various different securities rather than depending on one. With the world, technology, and market expanding beyond their geographical boundaries, we can say that the opportunities and varieties in which investors can invest are also increasing. And here, with the ways getting opened towards the foreign markets and securities pertaining to the foreign companies and their stake, our investors are actually increasing the earning capacity of the economy along with their personal earning capacity utilizing the foreign shares.
But what are the tax implications that can arise from the earnings that investors make through their investments in foreign securities? The earnings made can take two forms majorly, and this includes:
- Dividend
- Capital Gains arising from the sale of securities
Tax on Sale of Foreign Securities
On the sale of foreign securities, the investor will be earning a gain or loss. A gain is earned from the sale of foreign securities by the investor when he is able to dispose of the securities at a price higher than the price at which he purchased the securities. This shall be taxed in the hands of the Indian resident as global income shall be taxed in such assesse’s hands. For the purpose of taxation, we can see that the foreign stocks and unlisted equity shares in India are treated at par with the other.
This gain would be taxed in the hands of the assessee under the heading ‘Income from Capital Gain’. Here, the same shall be either of the below two;
- Long-term Capital Gain (LTCG), or
- Short-term Capital Gain (STCG).
The determination of LTCG or STCG shall be done on the basis of the period for which the securities are held by the investor on hand before he has sold such shares and earned such gain.
Long-term Capital Gain
Long-term capital gain or LTCG from the sale of foreign securities arises when the investor holds the foreign securities for a period of more than 24 months and sells the same at a price higher than the price at which the assessee bought the securities. Once securities are sold, a gain that the investor made shall be taxed at a flat rate of 20%.
For computing the gain or Long-term capital gain from the sale of foreign securities, the following should be followed:
The full value of consideration
Less: Indexed Cost of acquisition
Less: An expense which was expended wholly and exclusively in connection with such transfer
Here, the investor shall benefit from indexation while computing the LTCG, and for this, the CII (Cost of Inflation Index) will be used. This is utilized to calculate the inflation-adjusted cost price of an asset. This inflation-adjusted price would then be used to arrive at the LTCG or LTCL (Long-term Capital Loss). The formula for computing this indexed cost of acquisition of the shares or securities sold is given below:
Indexed Cost of Acquisition or ICOA = [(COA)] × [(CII for the year of transfer)/ (CII for the year of the acquisition or for the Financial Year 2001-02, w.e.i.l)]
Here, COA = Cost of Acquisition
CII = Cost Inflation Index
w.e.i.l = Whichever is later.
Say, Mr. X brought foreign shares amounting to INR 10 Lakhs on 01.01.2007. He sold the same in February 2021 for INR 25 Lakhs. As these securities were held by Mr X for a period of more than 24 months or 2 years, the gain or profit which is arising from the sale of the same is LTCG and should be taxed at a rate of 20% (flat). So,
The full value of consideration = INR 25,00,000
Less: Indexed Cost of acquisition = INR 23,68,852.50
[(10,00,000)] *[(289/122)]
Less: Expenditure spend wholly for,
and exclusively in connection
with such transfer (if any) = NIL
LTCG = INR 1,31,147.50
Tax on LTCG @ 20% = INR 26,229.50
Short-term Capital Gain
Now, if the investor held the foreign securities for a period of 24 months or less than the same then the gain which is arising from the sale of such foreign securities shall be taxed under the head, ‘Income from Capital Gains’, as STCG or Short-term capital gains. The amount of gain derived shall be added to the taxable total income of the assessee, and the tax rate shall be applicable on the basis of the normal tax slab rates, which would be applicable to the assessee. The STCG from the sale of foreign securities shall be computed as below:
The full value of consideration
Less: Cost of acquisition of an asset
Less: Expenditure that is spent wholly and exclusively in connection with such transfer
Mr. X brought foreign shares amounting to INR 10 Lakhs on 01.01.2019. He sold the same in November 2020 for INR 15 Lakhs. As Mr X held these securities for a period of less than 24 months or 2 years, the gain or profit arising from the sale of the same is STCG and should be added to the total taxable income of the assessee and taxed at the normal tax rate applicable to the assessee as per the Income Tax Slab. So,
The full value of consideration = INR 15,00,000
Less: Indexed Cost of acquisition = INR 10,00,000
[(10,00,000)] *[(289/122)]
Less: Expenditure incurred wholly
and exclusively in connection
with such transfer (if any) = NIL
STCG = INR 5,00,000
Thus, we can conclude that the gain arising from the sale of foreign securities can be taxed under the heading ‘Income from Capital Gains’ and shall be taxed on the basis of the provisions pertaining to the same. Hence, if there is a loss arising from the sale of such foreign securities, then this shall also be treated in accordance with the provisions of this section.
