Capital Gain Tax Computation - u/s 50AA can apply in Foreign Securities (US)

[PRIYAM KHAMBHATA]

Respected Sir

My client is Citizen of US but Ordinary Resident of India for the FY 2025-26, he has sold certain following foreign securities during the FY 2025-26,

ISHARES CORE TOTAL BOND ETF - IUSB

ISHARES RUSSELL 2000 GROWTH ETF - IWO

ISHARES RUSSELL 2000 VALUE ETF - IWN

VANGUARD SHORT TERM BOND - BSV

VANGUARD TOTAL BOND MARKET - BND

ISHARES RUSSELL 2000 GROWTH ETF - IWO

My query is that can the provision of section 50AA - Special Provision for computation of capital gain, affect on sold of above Foreign Securities. Please guide me.

Thanks

[Sanjeev Agarwal]

Opinion

On the facts stated, Section 50AA should generally not apply to the transfer of the U.S.-listed ETFs, namely IUSB, IWO, IWN, BSV and BND, by your client, even though he is a Resident and Ordinarily Resident (ROR) in India for FY 2025-26.

Section 50AA is a special provision applicable only to:

1. Units of a Specified Mutual Fund; and
2. Market Linked Debentures (MLDs).

The definition of a Specified Mutual Fund refers to debt-oriented mutual funds covered under the Income-tax Act and regulated under the Indian mutual fund framework. The U.S.-listed ETFs in question are foreign securities issued by foreign fund houses (iShares and Vanguard) and listed on U.S. stock exchanges. They are not units of a Specified Mutual Fund within the meaning of Section 50AA.

Accordingly, the transfer of these ETFs should be governed by the general provisions relating to capital gains and not by Section 50AA. The residential status of the assessee (ROR) merely determines that the gains are taxable in India as part of his global income; it does not extend the scope of Section 50AA.

Therefore:

• If the holding period is 24 months or less, the gain would be Short-Term Capital Gain (STCG) taxable at the applicable normal rates.
• If the holding period exceeds 24 months, the gain would generally qualify as Long-Term Capital Gain (LTCG) and be taxed under the normal provisions applicable to foreign securities (subject to the provisions of the Act and the India-USA DTAA, where applicable).

Important Caveat: This conclusion is based on the assumption that the investments are direct holdings in U.S.-listed ETFs through an overseas broker. If the investments are instead units of an Indian mutual fund or a fund-of-funds investing overseas, the applicability of Section 50AA would require separate examination.

Conclusion: On the stated facts, Section 50AA should not apply to the sale of the above foreign ETFs, and the gains should be computed under the ordinary capital gains provisions of the Income-tax Act.

[PRIYAM KHAMBHATA]

Respected Sir

Thank you for guidance me. However, In reference to your opinion, I would like to confirm that you have given opinion on Specified Mutual Fund ie US Listed ETFs', but my client has sold US Bond also. Therefore, my query regarding sold out

VANGUARD SHORT TERM BOND - BSV

VANGUARD TOTAL BOND MARKET - BND

Whether, it is covered under Market Linked Debentures (above stated Bonds US), In this regards, the provision of section 50AA - Special provision for computation of capital gain on sold of Foreign Bonds will apply. Please guide me

Thanks

[Sanjeev Agarwal]

Thank you for your clarification.

In my earlier opinion, I had considered the transaction as relating to US-listed ETFs (Specified Mutual Fund units).

However, the securities now referred to by you are:

• Vanguard Short-Term Bond ETF (BSV)

• Vanguard Total Bond Market ETF (BND)

These are Exchange Traded Funds (ETFs) and not bonds issued by an issuer. Although the underlying investments comprise debt securities/bonds, the asset transferred by the investor is the unit of the ETF, and not the underlying bonds themselves.

Accordingly, these instruments should not be regarded as Market Linked Debentures merely because they invest in bonds. Therefore, the applicability of Section 50AA cannot be concluded solely on the basis that the underlying portfolio consists of bonds.

However, if the client has actually sold individual US bonds (such as US Treasury Bonds or Corporate Bonds) and not ETF units, the tax position would require a separate examination, as the applicability of Section 50AA would depend upon the legal nature of the instrument transferred.

Accordingly, I request you to kindly confirm whether the securities sold were:

1. Units of Vanguard ETFs (BSV/BND); or

2. Actual US bonds/debt securities.

Based on this confirmation, a conclusive opinion on the applicability of Section 50AA can be provided.

[PRIYAM KHAMBHATA]

Respected Sir

Thank you for guidance me. In reference to your opinion against Issue Id 121016, I am clarifying that my client has sold following US Market Bonds during the FY 2025-26

VANGUARD SHORT TERM BOND - BSV

VANGUARD TOTAL BOND MARKET - BND

In this connection, the provision of section 50AA - Special provision for computation of capital gain on sold of Foreign Bonds will apply. Please guide me

Thanks

AI Summary

ETF Units Versus U.S. Bonds: Section 50AA Depends on the Legal Nature of the Asset Actually Transferred
Direct holdings in U.S.-listed ETFs, including BSV and BND, are described as outside the specified mutual fund framework under Section 50AA. Although these ETFs invest in bonds, the transferred asset is the ETF unit, not the underlying bonds, and the units are not thereby treated as market-linked debentures. Section 50AA therefore cannot be applied solely because the portfolio contains debt securities. If individual U.S. Treasury or corporate bonds were transferred instead, applicability would require separate examination based on the legal nature of the instrument actually sold.