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

Capital gains taxation for NRIs in India applies when an NRI transfers or sells a capital asset that gives rise to taxable income in India. The tax treatment depends on the asset involved and whether the gain is classified as short-term or long-term.

Capital assets that may attract capital gains tax

An NRI may earn taxable capital gains from the transfer of assets such as:

• Residential or commercial property situated in India

• Listed and unlisted shares

• Equity-oriented and other mutual fund units

• Bonds and debentures

• Government securities and other eligible investment assets

How capital gains are calculated

In general, capital gains are calculated as follows:

Capital gains = Sale consideration – Transfer expenses – Cost of acquisition – Eligible cost of improvement

The applicable computation rules may vary depending on the asset and the date of transfer. Certain investments also have special provisions for NRIs.

Short-term and long-term capital gains

The holding period determines whether a gain is short-term or long-term:

• Listed securities, equity-oriented mutual fund units, and specified units: Generally long-term when held for more than 12 months.

• Other capital assets: Generally long-term when held for more than 24 months.

• Certain assets, such as market-linked debentures and specified unlisted bonds or debentures, may receive separate treatment under tax provisions.

Special tax provisions for NRIs

NRIs investing in specified foreign exchange assets may be eligible for special taxation provisions. In some cases, they may also qualify for concessional tax rates or exemptions when the prescribed conditions are met.

For example, eligible long-term capital gains may receive tax relief if the required sale proceeds are reinvested in specified assets within the applicable time limit. NRIs may also have the option to use normal tax provisions where these are more beneficial.

TDS and capital gains

Tax may be deducted at source on certain payments made to an NRI. For instance, when an NRI sells immovable property in India, the buyer may be required to deduct TDS before making the payment.

The TDS amount does not always represent the final tax liability. If excess tax has been deducted, the NRI may claim a refund by filing an income tax return, subject to applicable rules.

DTAA benefits

An NRI may also check the Double Taxation Avoidance Agreement between India and their country of residence. Where eligible, the relevant DTAA provisions may help prevent the same income from being taxed twice.

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.

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.

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.

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.

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.

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.

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.

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.