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- Tax Implications on Capital Gains Earned by NRIs
Updated on: 25 Jun, 2024 02:57 PM
Non-resident Indians (NRI) are liable to income tax only on the income earned from Indian sources. NRIs are obligated to pay tax in India on their Indian income, which may include bank deposits, shares of listed companies, immovable properties, jewelry, and business ventures. Selling property in India is one of the transactions that most NRIs do, but as an NRI, do you know this transaction attracts capital gain taxes? The tax amount to be paid depends upon the holding period of the property. If an NRI sells its property within two years of its date of purchase, short-term rates are applicable. However, if they sell it after two years, Long-Term Capital Gains taxes become applicable. Let us talk about it in detail.
Contents
- Capital Gains Taxation for NRI in India
- Types of investments and their tax implications
- Tax Savings on Capital Gains for NRIs
- FAQs
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.
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.
As an NRI, have you recently invested in the Indian stock market? To know how your gains and dividends will be taxed, consult Tax2win tax experts and minimize your taxes.
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.
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.
Save maximum taxes as an NRI on the investments made in India, hire an online CA. You can also connect with the experts at +91 91166 84439 | [emailprotected]
Frequently Asked Questions
Q- How can NRIs avoid double taxation?
India has entered into Double Taxation Avoidance Agreements (DTAAs) with numerous countries, with the primary objective of granting relief to Non-Resident Indians (NRIs), Persons of Indian Origin (PIOs), and Overseas Citizens of India (OCIs) from double taxation. Eligibility for claiming these benefits hinges upon being a tax resident in a nation with which India has concluded a DTAA.
Q- Can NRI avoid capital gains tax?
Under Section 54, Non-Resident Indians (NRIs) have the opportunity to seek exemption on capital gains arising from the sale of a long-term residential property in India. This exemption can be availed by reinvesting the proceeds in the purchase of a new residential house within the country.
Q- What is the 60-day rule of NRI?
The Foreign Exchange Management Act (FEMA) delineates explicit guidelines for discerning the residency status of individuals of Indian origin, whether they are classified as Resident Indians or Non-Resident Indians. To qualify as a Resident Indian, an individual must have resided in India for a minimum of 60 days in the previous year and at least 365 days in the preceding four years.
Q- Is There a Penalty for Not Declaring Your NRI Status?
In accordance with FEMA regulations, no penalties are imposed for failing to declare your Non-Resident Indian (NRI) status. However, it is imperative to either close your current savings account or promptly convert it into a Non-Resident Ordinary (NRO) savings account.
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CA Abhishek Soni
Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.
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