The tax implications of selling US-listed bonds

—Name withheld on request

As a resident of India, your worldwide income is chargeable to tax in India. This includes capital gains arising from the transfer of assets located overseas. For the purpose of computing capital gains, a capital asset is classified either as a short-term capital asset or a long-term capital asset. The gains from its transfer are accordingly taxed as short-term or long-term capital gains.

The Finance (No. 2) Act, 2024, has introduced specific changes with respect to the taxation of unlisted bonds. With effect from 23 July 2024, any capital gains from the transfer of unlisted bonds are deemed to arise from the transfer of a short-term capital asset, irrespective of the actual period of holding.

The Income-tax Act, 1961, does not define the term ‘unlisted bond’. In contrast, it defines ‘listed securities’ in another similar context to mean securities listed on a recognized stock exchange in India. Since only Indian stock exchanges are recognized for this purpose, securities listed on foreign exchanges do not qualify as “listed securities”.

In the absence of a statutory definition for unlisted bonds, reference may be made to the Memorandum explaining the Finance (No. 2) Bill, 2024, where the expressions “listed securities” and “listed bonds” are referenced together. Based on this intent, only bonds listed on Indian stock exchanges should be eligible for differential tax treatment between short-term and long-term gains. Bonds listed exclusively on foreign stock exchanges would, therefore, be treated as unlisted bonds and would give rise to short-term capital gains and be taxed at the applicable slab rate.

For computation purposes, capital gains are to be first determined in US dollars, being the difference between the sale consideration and the cost of acquisition. The resultant gain is then required to be converted into Rupees at the telegraphic transfer buying rate of the State Bank of India (SBI). If the sale proceeds are retained overseas and reinvested within the period permitted under FEMA (viz. 180 days), the conversion shall be made at the SBI telegraphic transfer buying rate as on the last day of the month immediately preceding the month of transfer of the capital asset.

Alternatively, if the proceeds are repatriated to India, the actual exchange rate at which such remittance is made will apply to calculate gains in Rupees.

Where such income has already suffered taxation in the foreign jurisdiction, relief may be claimed in India by way of foreign tax credit against the Indian tax liability on such gains. In addition, appropriate disclosures must be made in Schedule FA, Schedule FSI, and Schedule TR of the Indian income-tax return in relation to such bonds.

Harshal Bhuta is a partner at P. R. Bhuta & Co. Chartered Accountants.