Tax Implications on Capital Gains Earned by NRIs

Capital Gains Taxation for NRI in India

Tax implications of investments made by NRIs would depend upon the nature of investments as follows:

Short-Term Capital Gains (STCG): These gains arise from the sale of capital assets held for less than the specified holding period. The holding period varies depending on the type of asset:

• Equity Mutual Funds and Equity Shares: Less than 12 months.
• Debt Instruments (Bonds, Debentures): Less than 36 months (as of April 1, 2023).
• Immovable Property (Land, Building): Less than 36 months.

Long-Term Capital Gains (LTCG): These gains are earned from the sale of capital assets held beyond the specified holding period:

• Equity Shares and Equity Mutual Funds: Held for 12 months or more.
• Debt Instruments (Bonds, Debentures): Held for 36 months or more (as of April 1, 2023).
• Immovable Property (Land, Building): Held for 36 months or more.

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Types of investments and their tax implications

Taxability of Debt-funds and other capital assets

For investments like debt-oriented funds and unlisted securities besides shares, along with other capital assets, the distinction between short and long-term is crucial. If held for over 36 months, it's deemed long-term; otherwise, it's treated as short-term.

Long-term gains from such investments, including debt-oriented funds, are subject to a 20% tax rate with indexation. Short-term gains, however, are integrated into the individual's taxable income and taxed according to their applicable slab rate.

Furthermore, both short-term and long-term gains are subject to an additional 4% education and higher education cess.

NRI Capital Gain Tax on Shares

Capital gains from listed equity shares or equity-oriented mutual funds have different tax implications depending on the duration of the investment. For shorter durations, specifically less than 12 months, they fall under the bracket of short-term capital gains. In such cases, NRIs face a tax rate of 15%, and there's a corresponding TDS at the same rate.

Long-term capital gains are investments held longer than 12 months. The tax rate applied here is 10%, but this applies only to gains exceeding ₹1 lakh. Moreover, there's a 10% TDS deduction from these long-term capital gains.

This distinction between short-term and long-term capital gains allows for a more nuanced understanding of tax liabilities. It offers incentives for longer-term investments while ensuring a fair taxation system for shorter-term gains.

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Tax Rates on Capital Gains on Sale of Property by NRIs

Long-Term Capital Gains (LTCG) on property are subject to a flat rate of 20%, allowing investors to benefit from indexation to offset inflation. Meanwhile, LTCG on equity shares and units of equity-oriented mutual funds incur a 10% tax on gains exceeding ₹1 lakh, with other assets taxed at 20%.

Short-term capital Gains (STCG) vary depending on the applicability of Securities Transaction Tax (STT). When STT isn't applicable, STCG is taxed at normal slab rates. However, when STT is applicable, a 15% tax rate is imposed.

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Tax Savings on Capital Gains for NRIs

The exemptions and investment options available for long-term capital gains (LTCG), along with how Non-Resident Indians (NRIs) can utilize them for tax benefits:

Section 54:

• Eligibility: Applies to LTCG from the sale of residential property.
• Exemption: If you reinvest the LTCG amount in another residential property within 2 years (or construct a new property within 3 years), you can claim an exemption.
• NRIs: NRIs can also avail of this exemption by reinvesting in Indian residential property.

Section 54EC:

• Eligibility: Applies to LTCG from the sale of any long-term capital asset (not just property).
• Exemption: Invest the LTCG amount in specified bonds (such as REC or NHAI bonds) within 6 months of the sale. The lock-in period for these bonds is 5 years.
• NRIs: NRIs can utilize this exemption by investing in these specified bonds.

Section 54F:

• Eligibility: Applies to LTCG from the sale of any asset other than residential property.
• Exemption: Reinvest the LTCG amount in a residential property within 1 year before or 2 years after the sale. Alternatively, construct a new residential property within 3 years.
• NRIs: NRIs can also benefit from this exemption by reinvesting in Indian residential property.

Special Tax Regime for NRI Investors

There exists an optional tax regime for NRIs, under which income derived from certain specified foreign exchange (FOREX) assets is taxed at special rates, with certain restrictions on deductions and tax benefits.

Key Features of the Special Tax Regime

Tax Rates:

• Investment Income and Long-Term Capital Gains (other than specified assets): Taxed at 20%.
• Long-Term Capital Gains from specified FOREX assets (e.g., shares in Indian companies): Taxed at 10%.
• Other Income: Subject to normal tax rates.

Restrictions on Deductions and Exemptions:

• No benefits under Chapter VI-A deductions or indexation are available.
• No deductions for any expenditure or allowances are permitted when computing investment income under this regime.

Exemption from Furnishing Tax Returns:

• NRIs are exempt from filing tax returns under this regime if their total income consists solely of:
  • Income from investments in FOREX assets.
  • Long-term capital gains arising from FOREX assets, with tax deducted at source (TDS).

Considerations for Opting the Special Tax Regime

NRIs should carefully evaluate the following before opting for the special tax regime:

• Loss of Certain Deductions: Opting for this regime means forfeiting deductions available under Chapter VI-A and the benefits of indexation.
• Simplified Compliance: If the NRI’s income is only from specified FOREX assets with TDS deducted, they are not required to file a tax return, simplifying compliance.

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