Section 115F of ITA, 1961 : Section 115F: Capital Gains On Transfer Of Foreign Exchange Assets Not To Be Charged In Certain Cases

Explanation using Example

Imagine a non-resident Indian named Raj who owns shares in a foreign company that qualify as a foreign exchange asset under the Income-tax Act. Raj sells these shares and makes a long-term capital gain of ₹10,00,000. He decides to reinvest ₹8,00,000 out of his net consideration from the sale into specified bonds which are a new asset as per the Income-tax Act, within six months of the sale of his original shares.

According to Section 115F of the Income-tax Act, Raj's tax liability will be calculated as follows:

• If Raj had invested the entire net consideration of ₹10,00,000 into the new asset, his entire capital gain of ₹10,00,000 would not be charged under section 45.
• However, since Raj invested only ₹8,00,000, the exempt portion of his capital gain will be proportionately calculated. This means ₹8,00,000 (cost of new asset) / ₹10,00,000 (net consideration) x ₹10,00,000 (capital gain) = ₹8,00,000 will not be charged under section 45. The remaining ₹2,00,000 is subject to capital gains tax.

Furthermore, if Raj decides to sell these specified bonds within three years of purchase, the exemption he claimed will be reversed, and the capital gains from the original asset will become taxable in the year he sells the bonds.