Navigating TDS compliance for share buybacks from NRIs

I am a resident Indian promoter of an Indian private limited company that manufactures and exports antique furniture. In 2015, my company allotted a small percentage of shares to a non-resident individual who assisted in securing export orders. I am now buying back his shares in my company. Will the payment made to him fall under the Liberalized Remittance Scheme (LRS), and what will be the applicable TCS/TDS (tax collected at source/tax deducted at source) on this transaction?

-Name withheld on request 

Under India’s foreign exchange regulations, a non-resident individual is permitted to invest in equity shares of an Indian manufacturing company and sell such shares to an Indian resident.

The TCS provisions for an individual are typically applicable on transactions where the payment made in forex by the individual is covered under LRS. Since the payment made by an Indian resident to purchase an Indian company’s shares from a non-resident individual does not fall under LRS, TCS provisions are not applicable in this case.

However, any payment made by a resident individual to any non-resident is covered under the TDS provisions, as per which the resident individual is required to deduct applicable TDS on the amount of income included in the payment. 

In this case, since a non-resident individual has held the shares for more than two years, the income arising in the hands of such non-resident individual will be classified as long-term capital gains. Thus, you will be required to deduct tax at source at 12.5% (plus applicable surcharge & cess) on the long-term capital gains when paying the non-resident individual.

I filed my Indian income tax return claiming a refund for FY2023-24. However, the refund failed because I mentioned my foreign bank account, and I do not have an Indian bank account at present. How do I get my refund now? Will I earn interest on the refund till I actually get the money into my bank account from the income tax department? 

-Name withheld on request 

The income tax department requires a validated bank account in India for the refund to be processed. Since foreign bank accounts are not accepted for refunds, you can open a special non-resident rupee (SNRR) account, which is a rupee bank account in India, for designated purposes. This account meets the requirements for refund processing.

Once you open the SNRR account, you can add it in the income tax portal and request a reissue of your refund. After the refund is credited to this account, you can repatriate the funds to your foreign bank account. If you are not required to file returns in India in the future, you can close the SNRR account after the refund process is completed.

Interest on the income tax refund is applicable only up to the date the refund is granted. Refunds are typically issued on the same date the intimation order under section 143(1) is sent to the taxpayer. If the refund is delayed due to the taxpayer’s failure to validate the bank account, it does not affect the date the refund is granted. Therefore, interest will not be paid after the original refund date, even if additional time is taken to open the SNRR account and receive the refund.

Harshal Bhuta, Partner, P. R. Bhuta & Co. CAs