From: Bobus175 (Original Message)Sent: 9/16/2005 1:52 AM
Admins: This question may have been asked earlier and suitably answered. If so, please point me to the relevant thread, and then delete this thread.
Question
Suppose an individual acquires shares traded on NASDAQ at a cost of $1,000 when the dollar-rupee exchange rate was 1:35
Suppose further the individual sold the shares six years later when he was ROR (resident and ordinarily resident) for $3,000 and that on the date of sale, the dollar-rupee exchange rate was 1:43
How is the capital gain on the sale computed under Indian domestic tax law? Is it
(a) [3,000 - 1,000] * 43 = Rs.86,000 or
(b) [43 * 3,000] - [35 * 1,000] = Rs.94,000 or
(c) Some other amount?
Inconclusive Answer (I welcome informed responses)
Per Section 48 of the Indian Income Tax Act:
48. The income chargeable under the head Capital gains shall be computed, by deducting from the full value of the consideration91 received or accruing as a result of the transfer of the capital asset the following amounts, namely: (i) expenditure incurred wholly and exclusively in connection with such transfer91; (ii) the cost of acquisition of the asset and the cost of any improvement91 thereto:
It appears that (a) is supported by the following references in Taxmann:
Conversion from foreign currency Rate of exchange on date of conversion must be applied - For converting capital gains accruing in foreign currency, the rate of exchange on the date of conversion is to be applied - D.A. Graham & N.G. F. Graham v. CIT [1985] 154 ITR 879 (Kar.). Uniform rate should be applied for consideration and cost of acquisition - Where capital gains are received in foreign currency, for conversion of amount received into Indian currency, uniform rate of exchange should be adopted for determining value of acquisition and consideration received for transfer of capital asset - Jayakumari & Dilharkumari v. CIT [1991] 189 ITR 99 (Kar.). However, if we take the view that US currency is also a capital asset, then the purchase and sale above involve exchange of one capital asset for another and it appears that (b) is supported by the following extracts from an Indian Income Tax Dept Publication at http://www.incometaxindia.gov.in/publications/4_Compute_Your_Capital_Gains/Chapter2.asp
"Where the asset was purchased, the cost of acquisition is the price paid. Where the asset was acquired by way of exchange for another asset, the cost of .acquisition is the fair market value of that other asset as on the date of exchange."
"Where the transfer is by way of exchange of one asset for another, fair market value of the asset received is the full value of consideration"
Admins: This question may have been asked earlier and suitably answered. If so, please point me to the relevant thread, and then delete this thread.
Question
Suppose an individual acquires shares traded on NASDAQ at a cost of $1,000 when the dollar-rupee exchange rate was 1:35
Suppose further the individual sold the shares six years later when he was ROR (resident and ordinarily resident) for $3,000 and that on the date of sale, the dollar-rupee exchange rate was 1:43
How is the capital gain on the sale computed under Indian domestic tax law? Is it
(a) [3,000 - 1,000] * 43 = Rs.86,000 or
(b) [43 * 3,000] - [35 * 1,000] = Rs.94,000 or
(c) Some other amount?
Inconclusive Answer (I welcome informed responses)
Per Section 48 of the Indian Income Tax Act:
48. The income chargeable under the head Capital gains shall be computed, by deducting from the full value of the consideration91 received or accruing as a result of the transfer of the capital asset the following amounts, namely:(i) expenditure incurred wholly and exclusively in connection with such transfer91; (ii) the cost of acquisition of the asset and the cost of any improvement91 thereto.
It appears that (a) is supported by the following references in Taxmann:
Conversion from foreign currency Rate of exchange on date of conversion must be applied - For converting capital gains accruing in foreign currency, the rate of exchange on the date of conversion is to be applied - D.A. Graham & N.G. F. Graham v. CIT [1985] 154 ITR 879 (Kar.). Uniform rate should be applied for consideration and cost of acquisition - Where capital gains are received in foreign currency, for conversion of amount received into Indian currency, uniform rate of exchange should be adopted for determining value of acquisition and consideration received for transfer of capital asset - Jayakumari & Dilharkumari v. CIT [1991] 189 ITR 99 (Kar.). However, if we take the view that US currency is also a capital asset, then the purchase and sale above involve exchange of one capital asset for another and it appears that (b) is supported by the following extracts from an Indian Income Tax Dept Publication at http://www.incometaxindia.gov.in/publications/4_Compute_Your_Capital_Gains/Chapter2.asp
"Where the asset was purchased, the cost of acquisition is the price paid. Where the asset was acquired by way of exchange for another asset, the cost of .acquisition is the fair market value of that other asset as on the date of exchange." "Where the transfer is by way of exchange of one asset for another, fair market value of the asset received is the full value of consideration"
Bobus, Since India does not have a LTCG tax, isn't this question moot?
If they did, (b) would be the right answer. (b) [43 * 3,000] - [35 * 1,000] = Rs.94,000
Similar situation occurs if a US resident invests in INR in say a NRE account, and the USD-INR rate goes down. Say you invest $1K in a NRE account with the exchange rate at 1$ = Rs 45, then after a year, say your Rs 45,000 becomes Rs 50,000 and the rate now is 1$ = Rs 40, so your net amount is $1,250. Hence you owe taxes on the difference = $250.
Mel: LTCG tax, in general, in India is not zero. It is zero only in respect of stocks traded on Indian stock exchanges that were acquired after paying securities transaction tax. The example I gave above does not involve such a stock.
I am inclined to believe the answer is (b), based on the extracts from the IT Dept publication above, and the view that foreign currency is also a capital asset. However, I am not 100% sure in view of the language used in the ruling in Jayakumari & Dilharkumari v. CIT [1991] 189 ITR 99 (Kar.).
What is your basis for believing the right answer is (b)?
In so far as US tax law is concerned, in the example given by you, the cap gain is unrealized, as far as I know, unless the balance in the NRE account is actually exchanged for dollars by the account holder.
The following link talks about which exchange rate to use (for determining Indian tax liability) thought it does not resolve whether the right answer is (a) or (b).
Attention is further invited to following rules of the Income Tax Rules, 1962: [LIST=1] Rule 115 lays down the rate of conversion into Rupees of income expressed in foreign currency, as follows: [/LIST] The rate applicable to the income shall be the telegraphic transfer rate on the specified date. The specified dates for various types of income are summarised as follows: Salaries: the last day of the month immediately proceeding the month in which salary is due, or is paid. Interest on Securities: the last day of the month immediately proceeding the month in which the income is due. Income from House Property and Income from Other sources: the last day of the previous year of the assessee. Business or Profession:
[LIST=1] in case of non-resident engaged in business of operation of ships, the last day of the month immediately preceding the month in which such income is deemed to accrue or arise in India. In other cases, the last day of the month immediately preceeding the month in which income is due. [/LIST] Dividends: the last day of the month immediately preceeding the month in which dividend is declared, distributed or paid by the company. Capital Gains: the last day of the month immediately preceeding the month in which capital assets is transferred. Where Tax has been deducted in accordance with Chapter XVII B, the date on which tax was required to be deducted. Rule 115A lays down the rate of exchange for conversion of rupees into foreign currency and reconversion for purpose of computation of capital gains read with Section 48(1)(a).
By the way, this in an issue that many folks will likely face after they R2I. I did see a thread where a similar question was posed in 2002 or thereabouts in this forum, but the thread did not have an answer, though someone did mention (s)he will check with Rajesh - the resident CA.
"Similar situation occurs if a US resident invests in INR in say a NRE account, and the USD-INR rate goes down. Say you invest $1K in a NRE account with the exchange rate at 1$ = Rs 45, then after a year, say your Rs 45,000 becomes Rs 50,000 and the rate now is 1$ = Rs 40, so your net amount is $1,250. Hence you owe taxes on the difference = $250."
If Rs.5,000 is interest income (as opposed to cap gain) credited to the NRE account, then I am inclined to believe your answer above is correct, in so far as US tax liability for a US resident is concerned.
With reference to Message 7, if it is interest income (as opposed to unrealized cap gain), then the US tax liability for a US resident is along the lines of (a) in the sense:
Taxable Income = Interest Income in Foreign Currency * Relevant Exchange Rate
My understanding is this issue has not yet been resolved completely with satisfaction.
The relevant sections for taxation were sought from Rajesh. However on one occassion he pointed out that the stocks and mutual funds not listed in Indian stock exchanges are not subjected to CG exception. He pointed out LTCG arising out of bond funds are subjected to taxes and so does the real estate CG. If we extend that opinion, taxes would be like (b) in #1. This would also allow us to deduct losses in the same style.
Glad to know I did not start a thread on an issue that had already been resolved on this forum.
The second para of Message 9 merely suggests CG taxes are applicable for stocks such as the one in Message 1 and 2, at least for an ROR (from not subjected to CG exemption) and that CG taxes are also applicable for bond and real estate transactions.
I do not see how an extension of the opinion in second para suggests that (b) is the right way to compute tax. The second para merely suggests that CG tax would be applicable and has nothing about how the computation will be made.
Bobus175 (Original Message)Sent: 9/16/2005 1:52 AM