Tax on Capital Gains from Selling Indian Company Shares: Resident vs Non-Resident

Why the Resident vs Non-Resident Distinction Matters

When a shareholder sells shares in an Indian company, the capital gains tax implications depend on two critical variables: the residency status of the seller and the type of shares being sold (listed vs unlisted). After the significant changes introduced in the Union Budget 2024-25 (effective 23 July 2024), the capital gains tax landscape has been substantially restructured.

For foreign investors — whether private equity funds, strategic acquirers, or individual shareholders — Indian capital gains tax can consume 12.5% to 20% of the gain, potentially more with surcharge and cess. Getting the structure right at the point of entry determines how much of the exit value you actually take home.

This guide provides a side-by-side comparison of how residents and non-residents are taxed on share sales, what exemptions are available, and how DTAA treaty benefits can reduce the effective tax rate.

Holding Period: Short-Term vs Long-Term Classification

The first determination is whether the gain is short-term or long-term, which depends on how long the shares were held before sale.

This classification is the same for both residents and non-residents. However, the tax rates that apply differ significantly.

Tax Rates for Residents (Indian Tax Residents)

Listed Equity Shares (STT-Paid)

For resident shareholders selling listed equity shares where Securities Transaction Tax (STT) has been paid on both purchase and sale:

• STCG under Section 111A: Taxed at a flat rate of 20% (increased from 15% effective 23 July 2024)
• LTCG under Section 112A: Taxed at 12.5% on gains exceeding INR 1.25 lakh per year (increased from 10% on gains exceeding INR 1 lakh). No indexation benefit is available.

Unlisted Shares

For resident shareholders selling unlisted company shares:

• STCG: Added to total income and taxed at the applicable income tax slab rates (up to 30% for individuals, 25-30% for domestic companies)
• LTCG under Section 112: Taxed at 12.5% without indexation benefit (changed from 20% with indexation effective 23 July 2024)

Resident Company Selling Shares

When a domestic company sells shares, the corporate tax implications depend on whether the company has opted for the concessional regime:

• Companies under Section 115BAA pay corporate tax at 22% (effective 25.17% with surcharge and cess), but capital gains are taxed separately at the applicable STCG/LTCG rates
• Manufacturing companies that commenced production on or before 31 March 2024 under Section 115BAB pay at 15% (effective 17.16%), with separate capital gains taxation

Tax Rates for Non-Residents (Including Foreign Companies)

Listed Equity Shares (STT-Paid)

Non-residents selling listed equity shares follow the same rates as residents for STT-paid transactions:

• STCG under Section 111A: 20% flat rate
• LTCG under Section 112A: 12.5% on gains exceeding INR 1.25 lakh per year

Unlisted Shares — Non-Resident Individuals and Foreign Companies

This is where the treatment diverges significantly:

• STCG: For non-resident individuals, STCG on unlisted shares is added to total income and taxed at applicable slab rates. For foreign companies, STCG on unlisted shares is taxed at the corporate tax rate of 35% (plus surcharge of 2-5% and 4% cess)
• LTCG under Section 112: Taxed at 12.5% without indexation and without the benefit of foreign currency fluctuation adjustment (post 23 July 2024 transactions)

For transactions before 23 July 2024, LTCG on unlisted shares for non-residents was taxed at 10% without indexation, with the option to compute gains in foreign currency.

Surcharge and Cess

Non-residents must also account for surcharge and health and education cess on top of the base capital gains tax rate:

Side-by-Side Comparison: Effective Tax Rates

The most significant disadvantage for foreign companies is the STCG rate on unlisted shares: 35% (plus surcharge and cess) compared to slab rates for individuals. This makes holding period planning critical for foreign PE/VC investors exiting Indian portfolio companies. Read our guide on 4 exit routes for foreign investors in Indian companies.

TDS Obligations on Share Sales

Non-residents face mandatory TDS (Tax Deducted at Source) on capital gains, which is a significant cash flow consideration.

TDS Rates for Non-Residents

• LTCG on listed shares: 12.5% TDS on the gain amount
• LTCG on unlisted shares: 12.5% TDS on the gain amount
• STCG on listed shares (Section 111A): 20% TDS
• STCG on unlisted shares: 30% TDS (or treaty rate if lower)

The buyer of shares from a non-resident is responsible for deducting TDS under Section 195 and must file Form 15CA and 15CB before remitting the sale proceeds outside India. The chartered accountant's certificate in Form 15CB must specify the applicable tax rate, including any DTAA benefit claimed.

Lower TDS Certificate

Non-residents can apply for a lower or nil TDS certificate under Section 197 if the actual tax liability is expected to be lower than the standard TDS rate. This is common when:

• The acquisition cost is high, resulting in minimal actual gain
• DTAA treaty relief reduces the effective rate
• Exemptions under Section 54EC or 54F are available

DTAA Treaty Benefits on Share Sales

Non-residents can claim relief under the applicable DTAA treaty between India and their home country. The capital gains article (typically Article 13) in most of India's DTAAs provides:

Key Treaty Positions

The Mauritius and Singapore routes, historically used for tax-efficient exits, no longer provide capital gains tax exemptions for investments made after April 2017. Investors routing through these jurisdictions must now pay Indian capital gains tax at the full domestic rate. Read our detailed guide on DTAA capital gains tax planning and how to claim DTAA benefits.

Exemptions Available to Reduce Capital Gains Tax

Section 54EC — Investment in Specified Bonds

Both residents and non-residents can claim exemption from LTCG by investing in specified bonds issued by NHAI (National Highway Authority of India) or REC (Rural Electrification Corporation):

• Maximum investment: INR 50 lakh per financial year
• Lock-in period: 5 years
• Investment deadline: Within 6 months from the date of transfer
• Applicable to: LTCG from sale of any long-term capital asset (including shares)

Section 54F — Investment in Residential Property

Both residents and non-residents can claim proportionate exemption from LTCG (other than from residential property) by investing in a residential house property in India:

• Investment requirement: Net sale consideration (not just the gain) must be invested
• Timeline: Purchase within 1 year before or 2 years after sale; construction within 3 years
• Maximum exemption: Capped at INR 10 crore (effective from April 2024)
• Condition: Taxpayer must not own more than one residential house (other than the new house) on the date of transfer

Section 54 — Reinvestment in Residential Property (For Property Gains)

This exemption applies to LTCG from sale of residential property, not shares. However, it is relevant when shares derive value substantially from Indian immovable property (see our article on indirect transfer tax).

Fair Market Value and Cost of Acquisition

Listed Shares — Grandfathering Provision

For listed shares acquired before 31 January 2018, the cost of acquisition is deemed to be the higher of:

• Actual cost of acquisition
• The lower of (a) the fair market value as on 31 January 2018, and (b) the full value of consideration on transfer

This grandfathering provision protects gains accrued up to 31 January 2018 from LTCG tax.

Unlisted Shares — FMV Determination

For unlisted shares, the fair market value is typically determined using one of these methods:

• Net Asset Value (NAV) method — book value of net assets per share
• Discounted Cash Flow (DCF) method — present value of future cash flows, certified by a merchant banker
• Comparable Companies method — valuation based on comparable listed company multiples

The valuation method must be selected at the time of acquisition and consistently applied. Getting the FMV right at entry is critical for minimizing capital gains tax at exit.

FEMA and RBI Considerations for Non-Resident Share Sales

Beyond tax, non-residents selling shares in Indian companies must comply with FEMA regulations:

• Pricing guidelines: Transfer of shares from a non-resident to a resident must be at or below the FMV determined as per FEMA valuation norms (Rule 21 of FEMA NDI Rules). Transfer from a resident to a non-resident must be at or above FMV.
• Sectoral caps: The transfer must not result in breach of FDI sectoral caps
• Reporting: FC-TRS filing is required within 60 days of the share transfer
• Repatriation: Sale proceeds can be repatriated only after tax payment and CA certificate in Form 15CB. Read our guide on profit repatriation from India.

Practical Tax Planning Strategies

For Non-Resident Investors

1. Hold for the long-term threshold: For unlisted shares, ensure a holding period of at least 24 months to qualify for 12.5% LTCG instead of 35% STCG (for foreign companies)
2. Structure entry through optimal jurisdiction: While Mauritius and Singapore no longer offer capital gains exemptions, certain DTAAs still provide partial relief. Evaluate the specific treaty provisions before structuring the investment.
3. Invest in Section 54EC bonds: Park up to INR 50 lakh of LTCG in NHAI/REC bonds for 5 years to claim full exemption on that portion
4. Apply for lower TDS certificate: Avoid cash flow drain by obtaining a Section 197 certificate before the sale transaction
5. Obtain a Tax Residency Certificate: Essential for claiming any DTAA relief; must be obtained from the home country tax authority before the transaction

For Resident Investors

1. Utilize the INR 1.25 lakh LTCG exemption: Stagger equity sales across financial years to maximize the annual exemption
2. Harvest losses: Set off short-term capital losses against STCG and LTCG; long-term capital losses can only be set off against LTCG
3. Consider timing: If holding period is approaching 12 months (listed) or 24 months (unlisted), deferring the sale can reduce the effective rate from 20% STCG to 12.5% LTCG

For assistance with capital gains tax planning, Section 195 TDS compliance, or DTAA treaty application, explore our tax advisory services and FEMA compliance services.

Reporting Requirements: Income Tax Returns for Share Sales

Both residents and non-residents must report capital gains from share sales in their income tax returns. Non-residents must file ITR-2 (for individuals) or ITR-6 (for foreign companies), reporting the full computation of capital gains including acquisition cost, sale consideration, expenses of transfer, and any exemptions claimed. The return filing deadline is 31 July of the assessment year for non-audit cases and 31 October for cases requiring a tax audit.

Non-residents should also be aware that Indian income tax returns require disclosure of foreign bank account details for receiving refunds. If excess TDS has been deducted, the refund can only be issued to an Indian bank account or a designated bank account linked to the PAN. Obtaining a PAN (Permanent Account Number) is mandatory for all non-residents earning taxable income in India, and the application should be filed well before the share sale transaction to avoid compliance delays.

Set-Off and Carry Forward of Capital Losses

Understanding the loss set-off rules is critical for tax planning on share sales:

For Residents

• STCG losses can be set off against both STCG and LTCG from any capital asset
• LTCG losses can only be set off against LTCG — they cannot be set off against STCG or other income
• Unabsorbed capital losses can be carried forward for up to 8 assessment years from the year in which the loss was incurred
• Capital losses cannot be set off against salary, business income, or other heads of income

For Non-Residents

The same set-off rules apply to non-residents, but with an important practical consideration: non-residents must file an Indian income tax return to carry forward losses. If the return is not filed by the due date, the right to carry forward is forfeited.

Loss from STT-Paid Shares

LTCG losses under Section 112A (listed shares with STT paid) can only be set off against LTCG under Section 112A. They cannot be set off against LTCG from unlisted shares or other assets. This ring-fencing prevents mixing of losses across different capital gains categories.

Advance Tax on Capital Gains

Non-residents earning capital gains from share sales must pay advance tax in the quarter in which the gain arises. The advance tax schedule for the financial year is:

If capital gains arise in a specific quarter, the entire tax on that gain is payable in that quarter's instalment. However, if TDS has already been deducted under Section 195, the advance tax obligation is reduced by the TDS amount. Failure to pay advance tax attracts interest under Sections 234B and 234C.

Indirect Transfer Implications

When shares in an Indian company are held through an offshore holding structure, the sale of the holding company's shares (rather than the Indian company's shares directly) may trigger India's indirect transfer provisions under Section 9(1)(i). If the offshore entity derives at least 50% of its value from Indian assets worth at least INR 10 crore, the gain is taxable in India. Read our detailed article on indirect transfer tax for offshore holdings.

Key Takeaways

• Post July 2024, LTCG on both listed and unlisted shares is taxed at 12.5% for all categories of taxpayers, with the STCG rate at 20% for listed shares under Section 111A
• Foreign companies face the steepest STCG rate on unlisted shares at 35% plus surcharge and cess, making holding period planning critical
• TDS is mandatory on all share sale payments to non-residents under Section 195, with Form 15CA/15CB filing required before remittance
• Mauritius and Singapore treaty routes no longer provide capital gains exemptions for post-2017 investments
• Section 54EC bonds (up to INR 50 lakh) and Section 54F residential property investment remain viable exemption strategies for both residents and non-residents