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 24 months.
- Immovable Property (Land, Building): Less than 24 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 24 months or more.
- Immovable Property (Land, Building): Held for 24 months or more.
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 24 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 12.5% tax rate without 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 20%, 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 12.5%, but this applies only to gains exceeding ₹1.25 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 12.5% (without indexation). Meanwhile, LTCG on equity shares and units of equity-oriented mutual funds incur a 12.5% tax on gains exceeding ₹1.25 lakh, with other assets taxed at 12.5%.
Note: For immovable properties acquired before 23rd July 2024, taxpayers have the option to choose between the 12.5% tax rate (without indexation) and 20% (with indexation).
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 20% tax rate is imposed.
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 for NRI 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
When NRIs invest in certain specified assets in India, and the income from these investments is the only income the NRI has during the year and TDS has been deducted, then such NRI is not required to file an ITR.
Investments that Qualify for Special Treatment
Income from the below Indian assets that were acquired in foreign currency -
- A public or private Indian company shares
- Debentures issued by a publicly-listed Indian company (not private)
- Deposits made with banks and public companies
- Any security of the Central Government
- Other Central Government assets specified in the official gazette for this purpose.
No deduction under Section 80 is allowed while calculating investment income.
Special Provisions Related to Long-Term Capital Gains
For the LTCG from the sale of these assets, the benefit of indexation and deduction under section 80 is not available.
But you can avail an exemption on the profit earned under Section115F if the amount is reinvested into -
- Shares of Indian company
- Debentures of Indian public company
- Deposits with banks and Indian public companies
- Central Government Securities
- NSC VI and VII issues
In such cases, capital gains are proportionately exempt if the cost of the new asset is less than the net consideration.
If the new asset purchased is transferred or sold within 24 months, then the profit exempted will be added to the income of the taxpayer and taxed accordingly.
The above benefits are available to NRIs even when they become a resident until it is converted to money.
If the NRI chooses to opt out of these special provisions, then, the income will be charged to tax under the regular provisions of Income Tax Act
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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