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Tax Implications on Capital Gains Earned by NRIs: The Complete Guide

It is possible for a Non-Resident Indian to invest in the Indian capital markets if they have a PAN card and can complete their eKYC verification.
 

But since most investments come with definite taxation rules, it is essential to understand these tax implications.
 

Therefore, let us learn more about capital gains tax in India for NRIs in this blog.

Capital Gains Tax Rate for NRI in India

Taxation on fixed deposit investments

The interest earned on fixed deposits in the NRO account is subject to taxation. This includes deposits that contain income from rent, dividends, pension, interest, and other sources received in India.
 

The interest earned will be subject to a TDS rate of 30%. Unlike resident Indians who have a threshold limit of ₹40,000 for a tax deduction on fixed deposit interest, NRIs do not have such a limit. Therefore, TDS will be deducted from all interest earned from fixed deposits in the NRO account.
 

On the other hand, income earned from fixed deposits or savings in NRE accounts is tax-free. 
 

NRI capital gains tax on shares

The tax liability for capital gains on listed equity shares or equity-oriented mutual funds is classified into long-term and short-term capital gains.
 

If the investment in equity shares or mutual funds is held for less than 12 months, it is considered short-term capital gains. The capital gain tax rate for NRIs is 15%, and they are subject to TDS at the same rate.
 

Investments held for over 12 months are treated as long-term capital gains and are taxed at 10% on gains exceeding ₹1 lakh. Additionally, TDS at 10% will be deducted from such long-term capital gains.
 

Taxation on capital gains from debt mutual funds

If the investment in debt mutual funds is held for less than 36 months, it is considered a short-term capital gain and will be subject to taxation at the normal tax slab rates. On the other hand, if the investments are held for more than 36 months, they are treated as long-term capital gains and taxed at 20% with Indexation.
 

Budget 2023 has brought certain amendment, with effect from 1st April 2023 Debt mutual funds no longer enjoy the benefit of indexation while computing long term capital gains. Therefore these funds will now get taxed at applicable slab rates.
 

Tax on sale of unlisted shares

When unlisted shares are held for a duration of fewer than two years, the resulting capital gains are categorised as short-term and are subject to taxation at the applicable income tax rates according to the individual's tax slab. 
 

However, if the unlisted shares are sold after a holding period of two years or more, they are regarded as long-term capital gains. These long-term capital gains are then subject to a flat tax rate of 20%, and individuals may also benefit from indexation, which adjusts the cost of acquisition to account for inflation.
 

Tax on the purchase or sale of property

When a Non-Resident Indian (NRI) purchases the property from an Indian resident, the NRI is obligated to deduct a Tax Deduction at Source (TDS) at a rate of 1% on the payments to be made to the seller, given that the purchase amount exceeds ₹50 lakhs.
 

In the case of an NRI selling property in India, the tax liability depends on the duration of ownership. For long-term capital gains (property held for more than two years), a tax rate of 20% is applicable. As for short-term capital gains (property held for less than two years), tax should be paid at the normal tax slab rates.
 

If there are short-term capital gains on the sale of property, the NRI should deduct TDS at a rate of 30%, which includes surcharge and cess.

Tax Exemptions on Capital Gains Tax for NRIs in India

  1. Exemption for Long-Term Residential Property: NRIs can claim exemption on capital gains from the sale of a long-term residential property by purchasing a new residential house in India under Section 54. This section also allows the option to invest in two houses against the sale of a residential property, provided the gain is not more than ₹2 crores.

  2. Exemption for Other Long-Term Capital Assets: Capital gains from the sale of any long-term capital asset other than the residential property can be exempted under Section 54F.

  3. Conditions for Exemptions: Under both sections, the NRI must purchase another residential property within a specified timeframe or construct a new property within a given period from the date of transfer. The exemption will be reversed if the new property is sold within three years of its purchase.

  4. Exemption through Specified Bonds: Exemption from capital gains tax for NRIs is applicable by reinvesting the amount in specified bonds within a specified timeframe under Section 54EC. The maximum exemption that can be claimed by investing in these bonds is ₹50 lakhs.

  5. Capital gain Account Scheme: If the LTCG remains uninvested until the income tax return (ITR) filing due date, taxpayers can deposit the amount in a capital gain account with a designated bank, which can be subsequently withdrawn for investment within a specific time. Investing the exact amount intended for exemption is important, as the remaining portion will be subject to LTCG tax.

  6. Advance Tax Implications: NRIs are liable to pay advance tax if their estimated tax liability exceeds ₹10,000 in a financial year. Failure to pay advance tax may attract interest under Section 234B and Section 234C.

TDS Provisions for NRIs

NRIs are subject to Tax Deducted at Source (TDS) at applicable rates on capital gains, irrespective of any threshold value. The TDS rate is 10% for equity-related capital gains and 20% (post-indexation) for non-equity investments. Short-term capital gains from equity-oriented investments attract a TDS of 15% plus applicable cess, while non-equity-oriented investments (such as debt funds) are subject to a TDS of 30%.
 

NRIs are also eligible to purchase an NRI insurance policy in India that will be taxed as per the applicable Indian income tax laws. However, the maturity proceeds earned on the NRI life insurance may be subject to taxation if the amount exceeds a certain limit.
 

For Non-Resident Indians looking to purchase a life insurance policy in India, Tata AIA Life Insurance Plans offer a range of policies that one can choose from. 
 

Moreover, apart from the tax benefits, one can easily choose a high life insurance coverage to secure their family’s future and make flexible policy premium payments.

Conclusion 

As an NRI, understand the tax implications on capital gains earned from various sources and the exemptions under Sections 54 and 54F. These are not only important for making timely investments but also for claiming tax benefits. Lastly, one should be aware of the advance tax obligations and the applicability of TDS provisions.

Your Life, Your Legacy: Life Insurance Inquiry for Indians Abroad

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Tata AIA Life Insurance

A joint venture between Tata Sons Pvt. Ltd. and AIA Group Ltd. (AIA),  Tata AIA Life Insurance  is one of the leading life insurance providers in India. We post everything you need to know about life insurance, tax savings and a variety of lateral topics such as savings and investments in this space. You can access and read a host of different blogs, articles and pages at the Tata AIA Life Insurance Knowledge Center or get in touch with us with any queries or questions!

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Frequently Asked Questions

What is Section 48 NRI of the Income Tax Act?

Section 48 of the Income Tax Act is applicable if a Non-Resident Indian (NRI) purchases shares or debentures with foreign currency and then converts it into Indian Rupees (INR) when the asset is being sold. Therefore, the transaction takes place in INR with the buyer.

Can NRI claim 112A, and can an NRI avail of this provision?

Section 112A applies to the sale of listed equity shares, equity-oriented mutual funds, and units of a business trust, subjecting long-term capital gains exceeding ₹1 lakh to a tax rate of 10%. However, this provision is not applicable to Non-Resident Indians.

Disclaimers

  • Insurance cover is available under the product.

  • The products are underwritten by Tata AIA Life Insurance Company Ltd.

  • The plans are not a guaranteed issuance plan, and it will be subject to Company’s underwriting and acceptance.

  • For more details on risk factors, terms and conditions please read the sales brochure carefully before concluding a sale.

  • This blog is for information and illustrative purposes only and does not purport to any financial or investment services and do not offer or form part of any offer or recommendation. The information is not and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.

  • Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document issued by the insurance company.

  • Every effort is made to ensure that all information contained in this blog is accurate at the date of publication, however, the Tata AIA Life shall not have any liability for any damages of any kind (including but not limited to errors and omissions) whatsoever relating to this material.

  • Tax: *Income Tax benefits would be available as per the prevailing income tax laws, subject to fulfilment of conditions stipulated therein. Income Tax laws are subject to change from time to time. Tata AIA Life Insurance Company Ltd. does not assume responsibility on tax implications mentioned anywhere in this document. Please consult your own tax consultant to know the tax benefits available to you.