Capital Gain Tax for NRI

Understanding NRI Tax in India

NRIs are subject to specific taxation rules in India, which depend on:

• Their residential status

• The type and source of income

By understanding these rules, NRIs can effectively manage tax liabilities and ensure compliance.

Example:

Mr. Raj, an NRI in the USA, owns property in India and earns a rental income of ₹40,000 per month. This rental income is taxable in India. However, his salary from employment in the USA is not taxable in India.

Determining Residential Status for Tax Purposes

Your residential status is crucial for NRI taxation. It is primarily determined by the number of days spent in India during a financial year.

• Resident: Stayed in India for more than 182 days in a financial year.

• NRI: Stayed in India for less than 182 days in a financial year.

Example:

If Mr. Raj lived in India for less than 182 days in FY 2022-23, he would be classified as an NRI for that year.

Reporting Changes:

Update your residential status promptly on the Income Tax Department’s website when you leave India for employment or long-term purposes abroad. This ensures accurate tax obligations and avoids complications.

What is Taxable and What is Not in Income Tax for NRI

Following are the criteria for taxable and non-taxable income for NRIs in India:

Taxable Income for NRIs

1. Income Earned or Received in India:

   • Salary (if services rendered in India)

   • Rental income from Indian property

   • Business income in India

   • Capital gains from Indian assets

2. Income from Indian Assets:

   • Interest from fixed deposits, savings accounts, and bonds

   • Dividends from Indian companies

Example:

If Mr. Raj sells a property in India, the capital gains are taxable in India. If he sells a property in the USA, those gains are not taxable in India.

Non-Taxable Income for NRIs

• Foreign Income: Income earned outside India

• NRE and FCNR Interest: Interest earned on FCNR and NRE accounts

• Gifts and Inheritances: Gifts from relatives or inheritance

NRI Tax Slabs

• NRIs are taxed only on income earned or received in India.

• These are general income slabs; capital gains may be taxed at different rates.

• NRIs are not eligible for certain deductions available to residents.

Example:An NRI earning ₹7 lakh in FY 2022-23 falls in the ₹5 lakh–₹10 lakh range and pays 10% tax on income in that slab.

Short-Term vs Long-Term Capital Gains Tax for NRIs

Capital gains tax applies when NRIs sell property or investments in India. The tax rate depends on the holding period:

Short-Term Capital Gains (STCG)

1. Holding Period:

   • Immovable property: Less than 24 months

   • Listed equity shares/equity mutual funds: Less than 12 months

2. Tax Rate:

   • Property/other assets: As per income tax slab.

   • Equity shares/mutual funds: 15% (recently increased to 20% for NRIs, effective July 2024).

3. Example:

   An NRI sells land after 18 months and earns a profit. This is a short-term capital gain and taxed as per the relevant slab.

Long-Term Capital Gains (LTCG)

1. Holding Period:

   • Immovable property: More than 24 months

   • Listed equity shares/equity mutual funds: More than 12 months

2. Tax Rate:

   • Property/other assets: 20% with indexation benefit.

   • Equity shares/mutual funds: 10% (above ₹1 lakh, no indexation).

3. Example:

   An NRI sells a residential property after three years, earning ₹50 lakh profit. This is long-term capital gain, taxed at 20% with indexation.

Capital Gains Tax Table for NRIs

1. TDS on Capital Gains:

   • Long-term: 20% (property), 10% (equity)

   • Short-term: As per applicable rates

2. Exemptions:

   • NRIs can claim exemptions under Sections 54, 54EC, and 54F for long-term capital gains by reinvesting in specified assets.

Recent Changes and Budget 2025 Updates

1. LTCG Rate Alignment:

   The Union Budget 2025 proposes aligning LTCG tax rates for NRIs with those for residents, meaning NRIs and residents now face the same rates on capital asset transfers.

2. New Exemptions:

   Section 10(4H) now exempts capital gains for NRIs on the transfer of equity shares of domestic ship-leasing companies and IFSC units. Investments in GIFT City (IFSC) may benefit from tax-free capital gains.

3. TCS Threshold Raised:

   Tax Collected at Source (TCS) on remittances under the Liberalised Remittance Scheme (LRS) is now applicable only above ₹10 lakh, up from ₹7 lakh.

Special Tax Regimes and Provisions for NRIs

1. Specified Assets:

   If NRIs invest in specified Indian assets (e.g., shares, debentures, government securities) in foreign currency and this is their only Indian income (with TDS deducted), they may not need to file an ITR.

2. No Deductions:

   No Chapter VI-A deductions (like Section 80C) are allowed for such investment income.

3. Section 115F Exemption:

   NRIs can claim proportional exemption on LTCG if the proceeds are reinvested in specified assets. If the new asset is sold within 24 months, the exempted gain becomes taxable.

Filing Income Tax Returns (ITR) for NRIs

1. When to File:

   If taxable Indian income exceeds ₹2.5 lakh in a financial year, or to claim a refund for excess TDS, NRIs must file an ITR.

2. Form to Use:

   NRIs with salary, capital gains, or other income (except business/profession) should file ITR-2.

3. Due Date:

   Usually, July 31 of the assessment year.

4. Modes of Filing:

   • Online (with/without digital signature)

   • Electronic verification code

   • Paper filing (only for those above 80 years)

Example 1:

An NRI with ₹6 lakh rental income must file an ITR, even if below the exemption limit, to report Indian income and pay tax as per slabs.

Example 2:

An NRI who worked in India for a few months, earning ₹4 lakh salary (with TDS deducted), must file an ITR to claim a refund for excess TDS.

Key Considerations and Compliance Tips

• Always determine and update your residential status before the financial year ends.

• Report all Indian income, including capital gains, in your ITR.

• Keep documentation for the purchase and sale of assets to calculate capital gains and claim indexation.

• Consult a tax professional for complex cases or if you have cross-border income.

• Monitor annual changes in tax laws, especially after major budgets.

Conclusion

Capital Gain Tax for NRIs demands careful attention to asset type, holding period, and applicable tax rates. Staying informed about exemptions, deductions, and other things can significantly ease the financial burden. Proper planning not only ensures compliance with Indian tax laws but also maximises investment outcomes. For a seamless experience, NRIs are encouraged to seek expert guidance to efficiently manage their tax obligations and secure their financial future.