Is TDS Applicable on Sale of Shares from Non-Resident to Non-Resident?

The taxation of share transactions involving non-residents (NRs) is a complex subject under the Indian tax laws. One common question that arises is whether Tax Deducted at Source (TDS) applies when one non-resident sells shares to another non-resident.

This article delves into the TDS implications under the Income Tax Act, 1961, including various scenarios, applicable tax rates, compliance requirements, and potential exemptions under the Double Taxation Avoidance Agreement (DTAA).

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1. Taxation of Capital Gains for Non-Residents

The taxation of share transfers for non-residents depends on the nature of the capital gain:

A. Capital Gains Tax

Capital gains arise when shares are sold at a price higher than their acquisition cost. The tax rates differ based on the holding period:

• Short-Term Capital Gains (STCG): If the shares are held for 24 months or less (for unlisted shares) or 12 months or less (for listed shares), the gains are taxed at 30% (for non-residents) under Section 195.
• Long-Term Capital Gains (LTCG): If shares are held for more than 24 months (unlisted) or more than 12 months (listed), the gains are taxed at 10% without indexation benefits.

B. Section 195: TDS on Payments to Non-Residents

Section 195 of the Income Tax Act, 1961, mandates that TDS must be deducted on any payment made to a non-resident if such income is taxable in India. Since capital gains from the transfer of an Indian company’s shares are deemed to arise in India, TDS may be applicable.

2. TDS Applicability on Sale of Shares Between Non-Residents

Whether TDS is applicable depends on whether the shares being transferred are listed or unlisted:

Scenario 1: Sale of Listed Shares on a Recognized Stock Exchange

If a non-resident (NR) sells shares of an Indian company through a recognized stock exchange, the transaction is subject to Securities Transaction Tax (STT).

TDS Implications:

• No TDS is required as per CBDT Circular No. 4/2015.
• The capital gains tax must still be paid when filing the return.

Scenario 2: Sale of Unlisted Shares (Private Companies & Startups)

If a non-resident sells unlisted shares of an Indian company to another non-resident, the capital gains are taxable in India under Section 9(1)(i) of the Income Tax Act.

TDS Implications:

• The non-resident buyer must deduct TDS under Section 195 at the applicable rate.
• TDS Rates:
  • LTCG (held >24 months): 10% (without indexation)
  • STCG (held ≤24 months): 30%
• Form 27Q must be filed for TDS compliance.

3. TDS Exemption Under DTAA

A non-resident seller can claim TDS exemption or lower TDS rates if a Double Taxation Avoidance Agreement (DTAA) exists between India and their country of residence.

DTAA Benefits

• Some treaties (e.g., Mauritius, Singapore, UAE) exempt capital gains taxation in India.
• The seller must provide a Tax Residency Certificate (TRC) and Form 10F to claim DTAA benefits.
• The buyer must verify DTAA applicability before deducting TDS.

4. TDS Compliance for Non-Resident Buyer

If TDS is applicable, the non-resident buyer must comply with Indian tax regulations:

1. Obtain a TAN (Tax Deduction and Collection Account Number).
2. Deduct TDS at the applicable rate.
3. Deposit TDS with the Indian government within the prescribed due date.
4. File TDS return (Form 27Q) to report the deduction.
5. Issue Form 16A (TDS certificate) to the seller for tax credit purposes.

5. Summary Table: TDS Applicability on Share Transfers Between Non-Residents

6. Example Calculation of TDS on Unlisted Shares

Example Scenario:

• Non-Resident Seller: Residing in the US.
• Non-Resident Buyer: Residing in the UK.
• Shares Sold: Unlisted equity shares of an Indian private company.
• Sale Consideration: ₹50,00,000.
• Cost of Acquisition: ₹20,00,000.
• Holding Period: 3 years (more than 24 months, hence LTCG applies).

Tax Calculation:

1. Capital Gains = Sale Price – Cost Price ₹50,00,000 – ₹20,00,000 = ₹30,00,000 (Long-Term Capital Gains)
2. TDS on LTCG (10%) ₹30,00,000 × 10% = ₹3,00,000
3. Total Amount Paid by Buyer After TDS Deduction ₹50,00,000 – ₹3,00,000 = ₹47,00,000
4. TDS Payment to Government by Buyer: The buyer must deposit ₹3,00,000 with the tax authorities and file a TDS return.

7. Key Takeaways

• No TDS is required on the sale of listed shares if sold on an Indian stock exchange.
• TDS is mandatory under Section 195 if unlisted shares are transferred from NR to NR.
• DTAA benefits may allow a non-resident seller to claim exemption or lower TDS rates.
• The buyer is responsible for ensuring TDS compliance.

Final Thoughts

TDS on share transfers between non-residents depends on multiple factors, including whether the shares are listed or unlisted, the holding period, and DTAA provisions. Given the compliance requirements, it is advisable for both buyers and sellers to seek professional tax advice before executing such transactions.