NRIs won’t pay capital gains tax on rupee bonds

Rupee-denominated offshore bonds, popularly known as masala bonds, on Wednesday got a tax benefit boost with the Budget exempting them from taxation for transfer among non-residents, while a low rate of 5 per cent will apply for investors till 2020.

The decision to levy lower tax deducted at source (TDS) of 5 per cent with respect to masala bonds would be retrospectively effective from April 1, 2016. Presenting the Union Budget 2017-18, finance minister Arun Jaitley proposed extending the concessional withholding rate of 5 per cent to masala bonds.

“A concessional with-holding rate of 5 per cent is being charged on interest earned by foreign entities in external commercial borrowings or in bonds and government securities.

“This concession is available till June 30, 2017. I propose to extend it to June 30, 2020. This benefit is also extended to rupee-denominated (masala) bonds,” he said.

The decision to continue with lower TDS rate for masala bonds has been taken after demands from various stakeholders in this regard.

“It is further proposed to extend the benefit of Section 194LC to rupeedenominated bond issued outside India before July 1, 2020. This amendment will take effect retrospectively from April 1, 2016 and will, accordingly, apply in relation to the assessment year 2016-17 and subsequent years,” according to the Budget.

With respect to transfer of masala bonds among non-residents also, the government has received representations seeking certain exemptions.

“Representations have been received to allow exemption from capital gain arising to secondary holders as well.

“It has also been represented to allow exemption in respect of transfer of rupee denominated bonds from non-resident to non-resident for the purpose of increasing acceptability and transferability of such instrument in the foreign market," the Budget said.

In order to provide relief in respect of gains arising on account of appreciation of rupee against a foreign currency at the time of redemption of masala bonds to secondary holders, the government has decided to amend the Income-Tax Act.

As per the Budget, amendment would be effected to ensure that “the said appreciation of rupee shall be ignored for the purposes of computation of full value of consideration”.

Another proposal is to provide that any transfer of rupee denominated bond of Indian company issued outside India, by a non-resident to another non-resident would not be regarded as transfer. In this regard, the amendments would be effective from April 1, 2018 and will, accordingly, apply in relation to the assessment year 2018-19 and subsequent years.

It has also been represented to allow exemption in respect of transfer of rupee denominated bonds from non-resident to non-resident for the purpose of increasing acceptability and transferability of such instrument in the foreign market