Taxability on the Capital Gains in India For NRIs

Non-Resident Indians (NRIs) have to pay taxes in India only on the income they have earned from Indian sources. The NRIs are required to pay taxes on their Indian income, including bank deposits, shares of listed companies, jewellery, immovable properties, and business ventures. One of the most common transactions done by NRIs in India is selling a property, and it is important that they know that such a transaction attracts capital gain taxes. 

In this blog, we have discussed the taxability of capital gains in India from the Non-Resident Indian perspective. We have also mentioned the exemption they are eligible to claim and the ways in which they can save taxes on capital gains.

Understanding the Capital Gains Tax Rate for NRIs in India

The Indian Tax laws are applicable to individuals as per their residential status. A person who is a resident of a country is taxed on their overall global income, whereas a non-resident is taxed only on their Income which is accrued in India.  

The tax implications for the Non-Resident Indians (NRIs) on their investments depend on the nature of the investment, as follows:

Short-Term Capital Gains (STCG)

These profits come from the sale of those capital assets that are held for less than the specified period of time. The holding period can be different, as per the type of asset:

• Market-linked debentures, Debt Mutual Funds, and Unlisted Bonds or Debentures are considered as short-term capital gains.
• For Units of UTI, equity-based mutual Funds, and Listed Equity Shares, the holding period is less than 12 months.
• For the Immovable properties, like land and buildings, the holding period is less than 24 months.

Long-Term Capital Gains (LTCG)

These are the gains that are earned by the individuals from the sale of the capital assets that are held for more than the specified holding period: 

• For the immovable property, such as land and buildings, the holding period is 24 months or more.
• For the Equity-Oriented Mutual Funds, Listed Equity Shares, and Units of UTI, the holding period is 12 months or more.

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Investment Types And Their Tax Implications

The Tax implications depend on the different types of investments. In this section, we have mentioned them:

Taxation on FD Investments for NRIs

NRO Account Fixed Deposits

• In NRO (Non-Resident Ordinary) accounts, the interest earned on them is totally taxable in India.
• It includes the fixed deposit interest obtained from the various income sources, such as dividends, rent, pensions, and other earnings within India.
• On all the earned interest, a TDS (Tax Deducted At Source) at the rate of 30% is applied without any exemption.
• The resident Indians who get a deduction threshold of Rs 40,000, but the NRIs need to pay TDS on the total interest amount.

NRE Account Fixed Deposits

• The interest earned on the savings or fixed deposits in NRE (Non-Resident External) accounts is totally tax-free in India.
• Because of this reason, the NRE accounts are best for NRIs to invest in India as it provides better tax efficiency.

To eliminate the excess TDS or claim a refund, NRIs should file the income tax return (ITR) in India. It is mandatory specially because if they get the lower taxation under a Double Taxation Avoidance Agreement (DTAA). 

Taxation on the Sale of Unlisted Shares

• If the unlisted shares are sold within the 2 years of holding, the gains are considered as Short-term capital gains (STCG). The tax rate is applicable as per the slab rates.
• If the unlisted shares are sold after 2 years, the gains are considered long-term capital gains. The tax rate is applicable at 20%.

Taxation on Capital Gains By NRIs on Property Sales

The Long-term capital gains (LTCG) on the property are taxed at the rate of 12.5% without indexation. While LTCG on the equity shares and units of equity-oriented mutual funds are taxed at 12.5% on the gains more than Rs 1.25 lakhs, and the other assets are taxed at the rate of 12.5%.

NOTE: For the immovable properties that are acquired before 23rd July, 2024, the taxpayers are provided two options to choose from, 12.5% tax rate without indexation and 20% with indexation. 

The short-term capital gains (STCG) can be different as per the applicability of Securities Transaction Tax (STT). In case the STT is not applied, STCG are taxed at the normal tax slab rates. However, if STT is applied, a tax rate of 20% is applicable.

Taxation on Purchase or Sale of Property by NRIs

Under Section 194-IA of the Income Tax Act, if the value of the property is more than Rs 50 lakhs, the NRI should deduct the TDS at the rate of 1% from the payment given to the seller. 

The applicable tax rate depends on the duration of ownership:

Taxability of Debt Funds and Other Capital Assets

For all the investments, such as unlisted securities or other assets other than shares, along with other capital assets, finding the difference between short-term and long-term is very crucial. If they are held for more than 24 months, then they would be considered long-term, and other than that it would be short-term.

The long-term capital gains from these investments are taxed at the rate of 12.5% without indexation. The short-term gains are added to the taxable income of the individual, and they are taxed as per the applicable slab rate. 

Also, the long and short-term capital gains are subject to an additional education and higher education cess at the rate of 4%. 

NRI Capital Gain Tax on Shares

The capital gains from the listed equity shares on equity-oriented mutual funds have different tax regulations according to the duration of investment. For the short-term period, specifically less than 12 months, the gains are considered as the short-term capital gains. In these cases, the NRIs are taxed at the rate 20%, and the TDS is also applied at the same rate.

Long-term capital gains apply to investments held for more than 12 months. They are taxed at a rate of 12.5% and apply only to gains exceeding Rs 1.25 lakhs. Also, the TDS is deducted at the rate of 10% for such gains.

To understand the tax liabilities better, you should know the distinction between long-term and short-term capital gains. For the long-term investments, it offers incentives, while for the short-term gains, it ensures a fair taxation system.

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Tax Exemptions on Capital Gains Tax in India for the NRIs

Here are the tax exemptions on capital gains tax for NRIs in India:

1. Long-term Residential Property Exemptions: Under section 54, the NRIs are eligible to claim the exemption on the capital gains from selling a long-term residential property by buying a new Indian residential house. The NRIs are also allowed to invest in two houses under this section against the sale of the residential property, but the condition is that the gain should not be more than Rs 2 crores.
2. Exemptions for other Long-term capital assets: Capital gains obtained from the sale of any long-term asset except the residential property can be exempted as per section 54F.
3. Exemption via Specified Bonds: The NRIs can get exemption from the capital gains tax by reinvesting the amount in some of the specific bonds within a preferred timeframe under Section 54EC. The NRIs can claim the maximum exemption of Rs 50 lakhs by investing in these bonds.
4. Conditions for Exemptions: Under both sections 54 and 54F, the NRI has to buy another residential property within a certain timeframe or build a new property within a given duration of the data transfer. The total amount of exemption will be reversed if the new property is sold within the three years of its purchase. 
5. Advance Tax Implications: If the estimated tax liability of an NRI is more than Rs 10,000 in a financial year, then he has to pay the advance tax. If the NRI is unable to pay the advance tax, then it may attract interest under Section 234B and Section 234C.
6. Capital Gain Account Scheme: If the Long-term capitl gains remains iuninvested until the due date of the Income tax return (ITR), then the taxpayers can deposit the amount in teh account of capital gain account with a designated bank. You can also withdraw this amount for investment within a specific duration. It is important that you invest the exact amount that is intended for the exemption because the remaining amount will be subject to the Long-term capital gains tax.

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Tax Savings on Capital Gains For NRIs

Here are the exemptions and investment options for the Long-term capital gains (LTCG). We have also mentioned how the Non-Resident Indians can utilize them to get the tax benefits:

Section 54:

• Eligibility: It is applicable to LTCG for NRIs from the sale of residential property.
• Exemption: You can also claim an exemption if you reinvest the LTCG in another residential property within 2 years.
• NRIs: The NRIs are also eligible to avail this exemption if they reinvest their gains in the Indian residential property.

Section 54EC: 

• Eligibility: It is applicable to the LTCG from the sale of land or building both. 
• Exemption: You can get the exemption if you reinvest the LTCG amount in some of the specific bonds, such as REC or NHAI bonds, within 6 months of the sale. For such bonds, the lock-in period is 5 years.
• NRIs: NRIs can also get this exemption if they invest in these bonds.

Section 54F:

• Eligibility: It is applicable to the LTCG from the sale of any other assets apart from residential property.
• Exemption: You should reinvest the LTCG amount in a residential property within 2 yaers afetr or 1 year before the sale. It is also applicable if you build a new residential property within the first 3 years. 
• NRIs: The NRIs can also get the benefit by reinvesting in the residential properties located in India.

Special Tax Regime for the Non-Resident Indian Investors

If an NRI has invested in certain types of assets in India and their only income made in that year came from those investments and TDS has also deducted, then he does not have to file an Income Tax Return (ITR) in India. 

Eligible Investments For Special Treatment

 Income that came from the following Indian assets that were acquired in a foreign currency: 

• Any deposits made with the public companies and banks.
• Any securities of the central government.
• Shares from a public or private Indian company.
• Debentures issued by the Indian companies that are listed publicly.
• Other assets by the central government are mentioned in the official gazette for this purpose. 

While calculating the investment income, no deductions are allowed under Section 80.

Special Provisions For Long-Term Capital Gains 

From the sale of these assets for LTCG, the benefit of deduction and indexation under Section 80 is not allowed. But you are eligible to avail the exemption on the profit earned under Section 115F only if the sale proceeds are reinvested into:

• Indian public company debentures
• Deposits with Indian public companies and banks
• Indian company shares
• NSC VI and VII issues
• Central Government Securities

In these cases, the capital gains are exempted if the price of the new asset is less than the net consideration.

If you transfer or sell the new asset you have purchased within 24 months, then the profit exempted will be considered as the income of the taxpayer, and it will be taxed accordingly. 

The mentioned benefits are also available for the NRIs even when they have become a resident Indian until the profit is converted to money.

If the NRI decides to opt out of these provisions, then their income will be charged to tax under the regular provisions of the Income Tax Act. 

Considerations For Choosing the Special Tax Regime

Before choosing the special tax regime, the NRIs should carefully calculate the following:

• Loss of Specific Deductions: If you choose this tax regime, then you have to forfeit the deductions that are available under Chapter VI-A and the indexation benefits. 
• Simplified Compliance: If the income of an NRI comes only from the FOREX assets, with TDS deducted. They don't have to file an income tax return, and it simplifies compliance. 

Provisions of TDS for NRIs

The NRIs have to deduct TDS (Tax Deducted at Source) at the applicable rates on the capital gains, no matter the threshold value. The TDS rate is applicable for 10% for the equity-related capital gains aand 20% for the non-equity investments after indexation. The NRIs have to pay a TDS of 15% plus applicable cess on the short-term capital gains from equity-oriented investments. The non-equity-oriented investments, including debt funds, are subject to 30% TDS. 

The NRIs can also purchase an NRI insurance policy in India, and it will be taxed according to the Indian income tax laws. Also, keep in mind that the proceeds earned on the NRI life insurance are subject to taxation if the amount is more than a certain limit. 

Final Thoughts

It is important for the NRIs to understand the tax implications on the capital gains earned from different income sources and the exemptions comes under sections 54 and 54F. It is essential for the NRIs to make timely investments and also to claim the tax benefits. Also, the NRI should have an understanding of advance tax obligations and the application of TDS provisions. 

You can get help from the experts of Visament because they have expertise and they can provide you with legal advice. Customer assistance is available 24/7 on the platform, and the prices are also very affordable, which are easy on your pockets. You can also open an NRE or NRO bank account from our platform.