For Non-Resident Indians (NRIs) based in the UAE, trading in unlisted Indian shares presents both opportunities and complexities from a taxation perspective. Understanding these tax implications is crucial for ensuring compliance and optimizing investment strategies.

Determining Residential Status

The primary factor determining taxability is the residential status of the individual under the Indian Income Tax Act. An NRI is defined as someone who is not a Resident Indian. The criteria for determining residential status are based on the number of days of stay in India during the financial year and in the preceding years. Generally, an individual is considered a Resident Indian if they stay in India for 182 days or more during the financial year or have stayed for 365 days or more in the preceding four years and at least 60 days in the current financial year. If these conditions are not met, the individual is classified as an NRI.

Taxability of Income

NRIs are taxed only on income that is either received in India or accrues or arises in India. This principle is important when considering investments in unlisted Indian shares. Capital gains arising from the sale of such shares are generally taxable in India if the shares are situated in India.

Nature of Income: Business Income vs. Capital Gains

A critical aspect is determining whether the trading activity constitutes a business or an investment. If the NRI is actively engaged in global trading of shares and securities, the unlisted shares may be treated as stock-in-trade rather than a capital asset. In this case, the profits would be taxed as business income. Otherwise, the gains are taxed as capital gains.

Capital Gains Tax

Capital gains are further classified into short-term capital gains (STCG) and long-term capital gains (LTCG), based on the holding period of the unlisted shares. As per current regulations, unlisted shares held for more than 24 months are considered long-term capital assets.

Short-Term Capital Gains (STCG): STCG on unlisted shares are taxed at the applicable income tax slab rates for NRIs, based on their income bracket.

Long-Term Capital Gains (LTCG): Recent amendments have brought significant relief. Clause 72 of the Finance Act, 2024, has introduced a concessional LTCG tax rate of 10% for NRIs on the sale of unlisted shares, aligning them with resident investors. Previously, LTCG on unlisted shares for NRIs was taxed at a higher slab rate of up to 30%.

Impact of Forex Fluctuations

The Income Tax Bill 2025 introduced a provision to address the impact of foreign exchange (forex) fluctuations on capital gains. Clause 72(6) allows NRIs (excluding Foreign Portfolio Investors) to calculate capital gains in the same foreign currency used for acquiring the shares, adjusting for forex fluctuations between the purchase and sale. This ensures that NRIs are taxed on actual gains in USD terms, reducing instances of over-taxation due to rupee depreciation. It's estimated that this could reduce long-term capital gains tax by up to 72%.

Tax Implications on Buying and Selling Below FMV

If an NRI purchases and sells unlisted shares at prices lower than their fair market value (FMV), it could attract scrutiny under anti-abuse provisions of the Income Tax Act. If the consideration paid is less than the FMV by more than ₹50,000, the difference between the FMV and the actual consideration can be treated as income and taxed in India.

Tax Exemptions and Savings

NRIs can explore certain exemptions to reduce their capital gains tax liability. Section 54F of the Income Tax Act allows for exemption if the long-term capital gains are fully reinvested in one residential property in India.

Important Considerations

• NRO Account: If the transactions are done through an NRO (Non-Resident Ordinary) account, the income is taxable in India.
• Double Taxation Avoidance Agreement (DTAA): NRIs can check if a Double Taxation Avoidance Agreement (DTAA) exists between India and the UAE. If such an agreement is in place, they may be able to claim relief from double taxation.
• ITR Form: NRIs with taxable capital gains or investments in unlisted equity shares cannot file ITR-1.
• New Tax Regime: The new tax regime is the default tax regime; to opt out and be taxed under the old regime, one must explicitly indicate this when filing their return.

Disclaimer: This information is for general guidance only and does not constitute professional tax advice. NRIs should consult with a qualified tax advisor to understand the specific implications based on their individual circumstances and the latest applicable tax laws.