In one of its landmark moves that brings huge relief to Non-Resident Indian (NRI) investors, the Indian government has now made a tax amendment that lowers the long-term capital gains (LTCG) tax levy on unlisted shares. The move is especially welcome by NRIs who invest in Indian startups and private companies. The amendment not just infuses investor confidence, but also brings India closer to a more favorable investment hub for global Indians.
What Changed?
Up to now, NRI investors had to bear a higher tax incidence on capital gains generated by unlisted shares. Long-term capital gains on such shares were taxed at the applicable slab rate 30% in the case of NRIs. But through the addition of Clause 72 in the Finance Act, 2024, a new element has been added which now covers NRIs also with the benefit of a concessional LTCG tax rate of 10% for sale of unlisted shares, just like resident investors. This brings NRIs on par and erases an old inequality in the tax system of India.
Why This Matters for NRI Investors
This shift will make India an even more lucrative investment destination, especially for NRIs who want to invest in family businesses, SMEs, or startups. These are the ways that the move is advantageous for them:
- Lower Tax Burden: The tax on long-term capital gains on unlisted shares of NRIs goes down from as much as 30% to merely 10%. This is equal to significant savings.
- Level Playing Field: The new taxation regime places NRIs on a par with resident investors, ending discriminatory practices of the past.
- Boost to Startup Ecosystem: NRIs ready to invest in Indian startups can now do so with greater ease of mind, aware that their gains will not be substantially taxed.
- Ease of Compliance: The transparency in tax liability allows ease for NRIs to plan finances and render filing the income tax return easy in India.
Clause 72 and the 72% Relief Angle
One of the interesting aspects is that Section 72 of the Finance Act, 2024, can lower the taxation to 72% for certain NRI investors based on the tax slab they were previously in. For instance, an NRI who is in the maximum tax slab can previously have 30% on LTCG, now reduced to 10%, a grand 66–72% tax benefit. This step beautifully removes the disincentive of NRIs investing in Indian brains due to tax inefficiencies.
The Bigger Picture: Ease of Income Tax Return Filing
Another benefit of this tax reform is simplicity in income tax return filing by NRIs. As with a flat 10% charge on LTCG from unlisted shares:
- NRIs do not have to compute and explain tax under multiple slabs for such gains.
- It eliminates the complexity while reporting returns in their resident country.
- It simplifies it to estimate while making financial planning and reinvestment decisions.
- For individuals handling various sources of income in India rental, dividend, or selling shares, this amendment minimizes complexity and mistakes while reporting tax on income.
The step was met with welcome from financial planners and tax experts as they pointed out that India has finally aligned with global best practice. Concessional tax relief is prevalent in all developed economies for long-term investors, especially in the startup sector. India by granting this relief recognizes its global diaspora’s contribution and potential.
Also, this reform will raise the quantity of NRI investment in India’s private equity market. It gives an unmistakable message that India is open to receiving foreign money and serious about revamping its tax regime.
See also: New Tax Rule to Set Off LTC Loss with STCG
Conclusion
The NRI tax relief on unlisted shares is a landmark change in the way India has viewed foreign-based investors. Not only does it offer equity and convenience, but it also makes NRIs desire to become a part of India’s growth story. With one 10% tax on LTCG of unlisted shares, and less trouble in filing income tax returns, this is a situation that benefits investors and India both.
Frequently Asked Questions (FAQs)
Q1. What is the new tax rate on NRI investors of unlisted shares in India?
A. According to Clause 72 of the Finance Act, 2024, NRIs will pay a 10% tax on long-term capital gain of unlisted shares, in contrast to the previous slab-based taxes with a maximum cap of 30%.
Q2. Is this relief from tax provided to all kinds of unlisted shares?
A. Relief is allowed on all unlisted equity shares, whether of private sector firms, family-owned businesses, or start-ups, if the shares are held for 24 months or more.
Q3. How will this impact filing of income tax return by NRIs?
A. The relief makes filing of income tax returns easier by offering an across-the-board rate of 10% on LTCG on unlisted shares, making calculations easier, documentation simpler, and even allowing scope for tax mistakes.
Q4. Can the change be brought in from the current financial year?
A. Yes, the change is operative from April 1, 2024, and is prospective for all eligible transactions from FY 2024-25.
Q5. Why has this tax reform been introduced?
A. The reform is to achieve parity between NRI and resident investors, to promote foreign investment in Indian start-ups, and to ease the taxation system of NRIs.
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