Residential Status

Residential Status of an Individual

An Individual is said to be an Indian Resident for the purpose of Income tax if one of the following Basic conditions are satisfied:

a) An Individual is in India for at least 182 days in the previous year (PY).
b) An Individual is in India for at least 60 days in Previous Year & for 365 days or more in India during 4 years immediately preceding the Previous year.

If one of the above conditions are satisfied then he is resident of India as per Income Tax but an individual also needs to find out whether his residential status is resident and ordinarily resident (ROR) or resident but not ordinarily resident (RNOR).

If the Individual fulfills any one the following below conditions then he said to be resident but not ordinarily resident of India:

a) An Individual is a non resident for 9 years out of 10 years in India immediately before relevant financial year.
b) An Individual is in India for a period less than 729 day during 7 years immediately before the relevant financial year.

Else, he will be considered as a resident and ordinarily resident (ROR) in India.
These conditions need to be considered every year for every Individual, as taxability of Income is dependent upon whether he is a ROR or RNOR or NRI.

An individual is said to be Non-Resident if he does not fulfil any of the above-mentioned conditions.

Exceptions to Residential Status:

a) In case where an individual is a citizen of India and leaves India for the purpose of employment outside India in any financial year, then the 2nd condition stated above shall not apply and only 1st condition in respect of 182 days or more would apply. i.e. he will either be an NRI or a Resident and Not Ordinarily Resident.
b) In case where an individual is a citizen of India and who being outside India comes on a visit to India in any financial year, then the 2nd condition stated above shall not apply and only 1st condition in respect of 182 days or more would apply.

Computation of Period of Stay in India

For the purpose ascertaining residential status, the stay in India might not be for a continuous period. For computing the period of stay, total number of days in India during the relevant financial year shall be considered. It is not necessary that the stay should be only at one place, it can be anywhere in India.

For computing the period of 182 days for the purpose of residential status, the day when when he enters India and the day he leaves India should be considered as stay in India. Where his stay in India is close to 182 days, it has be calculated on hourly basis i.e. 24Hours will be considered as 1day.

Capital Gains

Capital Gains Tax in India

Budget 2019 Proposals: Benefit of rollover of Capital gains tax is to be increased from investment in one residential house to two residential houses. This for the taxpayers having capital gains up to Rs. 2 Crores under section 54 and can exercised once in a lifetime.

1. What is a Capital Gain?

Profit or gains deriving from the transfer* of a ‘capital asset‘ is a capital gain. This gain or profit shall be chargeable to income tax under the head capital gains in the year in which the capital asset was transferred. Similarly, if there is a decrease in the value of an asset with respect to its purchase price, it will be considered a Capital Loss.

In a case where the asset is inherited and sold by the person who inherits it, capital gains tax will be applicable. Assets received as gifts are exempted from the Income Tax Act.

* Definition of Transfer under section 2(47) – “Transfer” includes-

  1. Sale, exchange or relinquishment of a Capital asset; or
  2. Extinguishment of rights to use a Capital Asset; or
  3. Compulsory acquisition of Capital Asset by the government; or
  4. Conversion of capital asset into stock in trade of business; or
  5. Maturity or redemption of a zero coupon bond.
  6. Transaction of allowing the possession of any immovable property to be taken or retained in part performance of a contract as referred under section 53A of the Transfer of Property Act, 1882.

2. What is a Capital Asset?

As per section 2(14) of Income Tax Act, 1961, “Capital Asset” essentially means-

A) Any property that is held by the taxpayer irrespective of the usage of that property towards his business or profession.

B) Securities held by an Foreign Institutional investor who has invested in such a security in accordance with the regulations made under SEBI.

The Following assets are excluded from the definition of “capital assets’:-

i. Any stock-in-trade, consumables and raw materials used in the daily course of your business or profession

ii. Personal items that are movable such as clothes that are worn or furniture held by you are not considered capital assets. However, other items owned by you which are movable but yet considered a capital asset are:

a. Jewellery

b. Archeological collections

c. Drawings, paintings, sculptures or any other type of work of art

iii. Agricultural land in rural area India

iv. 6½% gold bonds (1977) or 7% gold bonds (1980) or national defence gold bonds (1980) issued by the central government

v. Special bearer bonds (1991)

vi. Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 notified by the Central Government

3. Types of Capital Assets:

Short-term capital asset is any capital asset that is held for not more than 36 months or less. Any gain arising from this asset is termed as Short-term capital gain.

Long-term capital asset is any asset that is held for more than 36 months. Any gain arising from this asset is termed as Long-term capital gain.

*In case of securities, the time period shall be taken as 12 months instead of 36 months.

From AY 2018-19 onwards – The requirement of 36 months has been reduced to 24 months in the case of immovable property such as land, building, and house property.

To illustrate – If you sell your land after holding it for 24 months or more, any income deriving will be treated as long-term capital gain provided that property is sold after 31st March, 2017. The same will not apply to movable property such as jewellery, paintings or sculptures etc. These need to be held for a period of 36 months to be categorized as a long term holdings.

Some assets ‘transferred’ after 10th July, 2014 (irrespective of their purchase date) and held for a period less than 12 months thereafter will be considered short term holdings.

These assets are:

  • Equity or preference shares of a listed company. Such company should be listed on a recognized stock exchange in India such as Bombay Stock Exchange (BSE) or National Stock Exchange (NSE)
  • Units of Unit Trust of India, whether listed on an exchange or not
  • Other Securities such as bonds, debentures etc which are also listed on a well-known stock exchange in India
  • Equity oriented mutual fund units, whether listed on an exchange or not
  • Zero coupon bonds (ZCBs), whether listed on an exchange or not

Where the above listed assets are held for a period of more than 12 months, they are considered long-term capital asset.

For Example if Mr. Rakesh Fernandes buys equity shares of Reliance Industries and on 21/08/1992 and transfers it to his son Mr. Rohan Fernandes on 21/08/2018, Mr. Rohan must hold it for a period of atleast 12 months (i.e. till 21/08/2019) for it to be considered long term. If he cannot hold it for a period of 12 months and sells it in the interim, short term capital gains rules will apply.

4. Difference between Capital Asset and Current Asset?

  • Capital Assets are long-term assets that an individual expects to hold more than one year and that cannot be readily convertible into cash.
  • Current assets are assets which can be readily convertible into cash within one year, it includes cash, accounts receivable etc.
5. Method of Computation of Long Term Capital Gain (LTCG)
Particulars Value (Rs) Value (Rs)
Sale consideration received or accruing as a result of transfer of capital asset   (XXX)
Less: Indexed cost of acquisition of asset (COA) (XXX)  
Less: Indexed cost of improvement to the asset (COI) (XXX)  
Less: expenditure incurred in connection with transfer or Cost of Transfer (XXX)  
Long-term capital gain   XXX
Method of Computation of Short Term Capital Gain (STCG)
Particulars Value (Rs) Value (Rs)
Sale consideration received or accruing as a result of transfer of capital asset   (XXX)
Less: Cost of acquisition of asset (COA) (XXX)  
Less: Cost of improvement to asset (COI) (XXX)  
Less: Cost of transfer (XXX)  
Short-term capital gain   XXX

While computing Long Term Capital Gains (LTCG):

(a) “ Indexed Cost of Acquisition” shall be taken instead of “Cost of Acquisition” and

(b) “Indexed Cost of improvement” shall be taken instead of “ Cost of Improvement”.

Here: “ Indexed Cost of Acquisition” means:

Cost of Acquisition X Cost Inflation Index (CII) for the year in which asset is transferred

Cost Inflation Index (CII) for the 1st year in which asset was held

by the assessee or for the year beginning on 1/4/1981

whichever is later.(CII of the Year of Acquisition)

Here: “ Indexed Cost of Improvement” means:

Cost of Acquisition X Cost Inflation Index (CII) for the year in which asset is transferred

Cost Inflation Index (CII) for the year in which improvement of asset took place

Here: “Cost of Improvement” means the Capital Expenditure incurred on the value addition of a capital asset.

6. NOTIFIED COST INFLATION INDEX UNDER SECTION 48

Cost Inflation Index (CII) is an indexation declared by the government every year in respect of calculating capital gains on long-term assets.

Note: In Budget 2017, Cost Inflation Index base has been changed from 1981 to 2001 and also revised the indices for subsequent years accordingly.

In respect of assets acquired prior to 1st April 2001, the assessee now has the option to use Fair Market Value or Indexed Cost of Acquisition for calculating the figure of long term capital gains.

The Revised Cost Inflation Index (CII) Chart applicable for FY 2017-18 and onwards:

Financial Year   Cost Inflation Index (CII)         Financial Year Cost Inflation Index (CII)      
2001-02 100 2010-11 167
2002-03 105 2011-12 184
2003-04 109 2012-13 200
2004-05 113 2013-14 220
2005-06 117 2014-15 240
2006-07 122 2015-16 254
2007-08 129 2016-17 264
2008-09 137 2017-18 272
2009-10 148 2018-19 280
Financial Year Old Cost Inflation Index (CII) Financial Year Old Cost Inflation Index (CII)
Before 1/4/1981 100 1999-00 389
1981-82 100 2000-01 406
1982-83 109 2001-02 426
1983-84 116 2002-03 447
1984-85 125 2003-04 463
1985-86 133 2004-05 480
1986-87 140 2005-06 497
1987-88 150 2006-07 519
1988-89 161 2007-08 551
1989-90 172 2008-09 582
1990-91 182 2009-10 632
1991-92 199 2010-11 711
1992-93 223 2011-12 785
1993-94 244 2012-13 852
1994-95 259 2013-14 939
1995-96 281 2014-15 1024
1996-97 305 2015-16 1081
1997-98 331 2016-17 1125
1998-99 351    

7. Tax on Capital Gains

The two types are tax on short-term capital gain or tax on long-term capital gain.

(1) Tax on long-term capital gain: As per Section 112 of Income Tax Act,

  • Long-term capital gain (after indexation) is taxable at 20% + surcharge and education cess.
  • Long-term capital gain (without indexation) is taxable at 10% + surcharge and education cess.

Note: As per Union Budget 2018, long-term capital gains on the sale of listed securities exceeding Rs.1,00,000 will be taxed at the rate of 10%.

(2) Tax on short-term capital gain:

  • If securities transaction tax is not applicable, the short-term capital gain is added to your income tax return and the taxpayer is taxed at the normal rates applicable to the assessee.
  • If securities transaction tax is applicable (Section 111A), the short-term capital gain is taxable at the rate of 15% + surcharge and education cess.

Tax on Equity and Debt Mutual Funds

Treatment of Sale of Debt and Equity Funds:

Particulars Recognised Provident Fund
  Short-Term Gains Long-Term Gains Short-Term Gains Long-Term Gains
Debt Funds Tax at slab rates of the individual 20% with indexation Tax at slab rates of the individual 10% without indexation or 20% with indexation whichever is lower
Equity Funds 15% Nil 15% Nil

Changes in Tax Rules for Debt Mutual Funds

Debt mutual funds, which are held for more than 36 months, qualify as a Long-term capital asset. This change has been in effect from last year’s Budget, which means that investors would have to remain invested in debt mutual funds for at least three years to take the benefit of long-term capital gains tax. In case it is redeemed within three years, the capital gains will be added to the income and will be taxed as per tax slab applicable.

NOTE: Deductions under chapter VI-A ( Section 80C-80U) shall not allowed to be reduced from LTCG Income referred to in section 112, STCG Income referred to in section 111A and casual income.