Capital Gains and Its Taxability for NRIs in India

Non-Resident Indians (NRIs) are generally liable to pay tax in India on income that is earned, received, or accrues in India. Such Indian-source income may include earnings from bank deposits, shares of listed companies, immovable property, jewellery, and business interests. Selling property or other investments in India can therefore have capital gains tax implications for an NRI.

Capital Gains Taxation for NRIs in India

The applicability of Indian income tax depends on the residential status of the taxpayer. While a resident may be subject to tax on global income, an NRI is generally taxed in India on income that is received, accrues, or arises in India, subject to the applicable provisions of the Income Tax Act and relevant tax treaties.

The tax treatment of investments held by NRIs depends on the nature of the capital asset and the applicable holding period. Capital gains are broadly classified as follows:

Short-Term Capital Gains (STCG)

Short-term capital gains arise when a capital asset is sold before completing the prescribed holding period. The applicable holding period varies according to the type of asset, including:

• Listed equity shares, units of UTI, and equity-oriented mutual funds: Held for less than 12 months.
• Debt mutual funds, market-linked debentures, and certain unlisted bonds or debentures: The applicable classification depends on the nature of the asset and prevailing tax provisions.
• Immovable property, such as land or buildings: Held for less than 24 months.

Long-Term Capital Gains (LTCG)

Long-term capital gains arise when a capital asset is held for at least the prescribed period before being transferred. Generally:

• Listed equity shares, units of UTI, and equity-oriented mutual funds: Held for 12 months or more.
• Immovable property, such as land or buildings: Held for 24 months or more.

Types of Investments and Their Tax Implications

Taxability of Debt Funds and Other Capital Assets

For investments such as unlisted securities other than shares and other capital assets, the distinction between short-term and long-term holdings is important. Assets held for more than 24 months are generally classified as long-term, while those held for a shorter period are treated as short-term.

Long-term capital gains from these investments are taxed at 12.5% without indexation. Short-term capital gains are added to the individual’s taxable income and taxed according to the applicable income tax slab.

In addition, both short-term and long-term capital gains are subject to a 4% health and education cess, along with any applicable surcharge.

NRI Capital Gains Tax on Shares

Capital gains earned by NRIs from listed equity shares or equity-oriented mutual funds are taxed based on the holding period. Investments held for less than 12 months are treated as short-term capital gains (STCG). For NRIs, such gains are generally taxed at 20%, with TDS applicable at the corresponding rate.

Investments held for more than 12 months are classified as long-term capital gains (LTCG). These gains are taxed at 12.5% on the amount exceeding ₹1.25 lakh, with TDS generally deducted at 10% on such gains.

The distinction between short-term and long-term investments helps determine the applicable tax rate and overall tax liability.

If you have recently earned capital gains as an NRI, understanding the taxation of your gains and dividends can help you manage your tax liability effectively.

Taxation on Fixed Deposit Investments for NRIs

NRO Account Fixed Deposits:

• Interest earned on fixed deposits maintained in an NRO (Non-Resident Ordinary) account is fully taxable in India.
• This includes interest generated from funds linked to Indian income sources such as rent, dividends, pensions, and other earnings.
• TDS is generally deducted at 30%, along with applicable surcharge and cess, without a threshold exemption.
• Unlike resident taxpayers who may qualify for certain interest-related deductions, NRIs are generally subject to TDS on the entire applicable interest income.

NRE Account Fixed Deposits:

• Interest earned on fixed deposits or savings maintained in an NRE (Non-Resident External) account is generally exempt from tax in India, subject to the applicable conditions.
• This makes NRE accounts a tax-efficient investment option for eligible NRIs.

To avoid excess TDS or claim a refund, NRIs should consider filing an income tax return in India, particularly where a lower tax liability may apply under a Double Taxation Avoidance Agreement (DTAA).

Tax Rates on Capital Gains from Sale of Property by NRIs

Long-term capital gains on the sale of property are generally taxed at a 12.5% rate without indexation. LTCG on listed equity shares and units of equity-oriented mutual funds is also taxed at 12.5% on gains exceeding ₹1.25 lakh, while other qualifying long-term capital assets are generally taxed at 12.5%.

Note: For immovable property acquired before 23 July 2024, taxpayers may have the option to choose between the 12.5% tax rate without indexation and 20% with indexation, subject to the applicable conditions.

Short-term capital gains depend on the nature of the asset and whether Securities Transaction Tax (STT) applies. Where STT does not apply, the gains are generally taxed at the applicable slab rates, while specified STCG subject to STT is taxed at 20%.

Tax on Sale of Unlisted Shares

• If unlisted shares are sold within 2 years of acquisition, the resulting gain is treated as Short-Term Capital Gain (STCG) and taxed according to the applicable income tax slab.
• If unlisted shares are sold after 2 years, the gain qualifies as Long-Term Capital Gain (LTCG) and is generally taxed at a flat rate of 12.5% without indexation.

Tax on Purchase or Sale of Property by NRIs

When an NRI purchases property from a resident seller and the property value exceeds ₹50 lakh, the buyer is required to deduct TDS at 1% from the consideration under Section 194-IA, subject to the applicable conditions.

For an NRI selling property, the applicable capital gains tax depends on the holding period:

Tax-Saving Options on Capital Gains for NRIs

NRIs can take advantage of various exemptions and investment avenues to reduce their tax liability on long-term capital gains (LTCG). The key provisions include:

Section 54

• Eligibility: Available on LTCG arising from the sale of a residential property.
• Exemption: The gain can be exempt if reinvested in another residential property within 2 years, or if a new property is constructed within 3 years.
• For NRIs: NRIs can claim this benefit by reinvesting in a residential property in India.

Section 54EC

• Eligibility: Applicable to LTCG arising from the sale of land, building, or both.
• Exemption: The capital gain can be invested in specified bonds, such as REC or NHAI bonds, within 6 months from the date of sale. These bonds have a 5-year lock-in period.
• For NRIs: NRIs are also eligible to claim this exemption by investing in the specified bonds.

Section 54F

• Eligibility: Applicable to LTCG arising from the sale of any asset other than a residential property.
• Exemption: The gains can be reinvested in a residential property within 1 year before or 2 years after the sale. Alternatively, a new residential property can be constructed within 3 years.
• For NRIs: NRIs can claim this benefit by investing in a residential property in India.

Special Tax Regime for NRI Investors

When an NRI invests in specified assets in India, and the income from these investments is the individual’s only income for the year with TDS already deducted, the NRI may not be required to file an ITR.

Investments Eligible for Special Treatment

The special provisions apply to income earned from certain Indian assets acquired using foreign currency, including:

• Shares of an Indian public or private company
• Debentures issued by a publicly listed Indian company
• Deposits with banks and public companies
• Securities issued by the Central Government
• Other assets of the Central Government notified in the Official Gazette

No deduction under Section 80 is available when calculating investment income.

Special Provisions for Long-Term Capital Gains

For LTCG arising from the sale of these specified assets, the benefits of indexation and deductions under Section 80 are not available.

However, an exemption under Section 115F may be claimed when the capital gains are reinvested in:

• Shares of an Indian company
• Debentures of an Indian public company
• Deposits with banks or Indian public companies
• Central Government securities
• NSC VI and VII issues

The exemption is proportionate when the amount invested in the new asset is lower than the net sale consideration.

If the newly acquired asset is sold or transferred within 24 months, the previously exempted capital gain will be added back to the taxpayer’s income and taxed accordingly.

These benefits can continue to be available to NRIs even after they become residents, until the investment is converted into money.

If the NRI decides not to use these special provisions, the income will instead be taxed under the regular provisions of the Income Tax Act.

Factors to Consider Before Choosing the Special Tax Regime

NRIs should consider the following points before opting for the special tax provisions:

• Loss of Certain Deductions: The special regime does not provide deductions available under Chapter VI-A or the benefit of indexation.
• Simplified Compliance: If the NRI’s only income is from specified foreign exchange assets and applicable TDS has been deducted, they may not be required to file an income tax return.

Disclaimer

This content is for informational purposes only and reflects provisions of the Income Tax Act as amended up to FY 2025–26. Please consult a Chartered Accountant for professional advice.

FAQ’s

1. What are capital gains for NRIs in India?
Capital gains are profits arising from the transfer of a capital asset, such as property, shares, mutual funds, or securities. NRIs may be liable to pay Indian income tax on capital gains arising from taxable assets located or transferred in India.

2. Are NRIs required to pay capital gains tax in India?
Yes. An NRI may be subject to Indian capital gains tax when selling taxable Indian assets. The applicable tax treatment depends on the type of asset, holding period, date of transfer, and relevant tax provisions.

3. Which assets can generate capital gains for an NRI?
Common assets include residential and commercial property, land, shares of Indian companies, mutual funds, securities, and other capital assets.

4. How are short-term and long-term capital gains determined for NRIs?
The classification depends on the prescribed holding period for the particular asset. Different types of assets can have different holding-period requirements, so the nature of the asset should be considered before calculating the gain.

5. What is the tax rate on capital gains for NRIs?
The tax rate depends on the type of asset, date of transfer, nature of the transaction, and applicable provisions of the Income Tax Act. Capital gains on different securities and immovable property may be subject to different rates.

6. How is capital gains tax calculated on the sale of property by an NRI?
Capital gain is generally calculated by deducting the applicable cost of acquisition and eligible transfer-related expenses from the sale consideration, with indexation or other adjustments applied where permitted under the relevant provisions.

7. Is TDS deducted when an NRI sells property in India?
Yes. The buyer is generally required to deduct tax at source from payments made to an NRI for the transfer of immovable property, subject to the applicable provisions and rates.

8. Can an NRI reduce capital gains tax on the sale of property?
An NRI may be able to claim exemptions or other tax benefits available under provisions such as Sections 54, 54F, or 54EC, subject to meeting the prescribed conditions.

9. Can NRIs claim Section 54 exemption?
Yes. An eligible NRI may claim a Section 54 exemption on long-term capital gains arising from the sale of a residential house if the prescribed conditions for reinvestment in another residential house are satisfied.

10. Can an NRI claim Section 54F exemption?
Yes. Section 54F may provide an exemption on eligible long-term capital gains arising from the transfer of certain assets other than a residential house when the prescribed conditions for investment in a residential house are fulfilled.

11. Can NRIs invest in specified bonds to save capital gains tax?
Eligible taxpayers, including NRIs where applicable, may claim benefits under Section 54EC by investing eligible long-term capital gains in specified bonds within the prescribed time and subject to the applicable limits and conditions.

12. Are capital gains on inherited property taxable for an NRI?
Inheritance itself generally does not constitute a transfer giving rise to capital gains. However, when the inherited property is subsequently sold, capital gains may arise based on the applicable cost and holding-period rules.

13. How is the cost of acquisition determined for inherited property?
For inherited property, the cost and previous owner’s holding period are generally determined according to the applicable provisions of the Income Tax Act.

14. Are capital gains from Indian shares taxable for NRIs?
Yes. Gains from the sale or transfer of Indian shares may be taxable in India. The applicable rate and classification depend on factors such as the type of shares, holding period, listing status, and date of transfer.

15. Are capital gains from mutual funds taxable for NRIs?
Yes. Redemption or transfer of mutual fund units can result in capital gains. The tax treatment depends on the type of mutual fund and the applicable provisions for the relevant assessment year.

16. Can NRIs claim DTAA benefits on capital gains?
Where applicable, an NRI may be able to claim benefits under the Double Taxation Avoidance Agreement between India and their country of residence, subject to satisfying the treaty’s conditions and documentation requirements.

Written by

Asha Ahuja Sethi (Head Admin at Jatin Sethi & Co., Chartered Accountants)