Tax on Investments for NRIs in India

Investing in India offers significant wealth-building opportunities for NRIs. However, understanding the tax obligations is complex. From equity shares and mutual funds to real estate and fixed deposits, each asset class carries its own tax treatment, holding period rules, and TDS obligations. Under the Union Budget 2024, several significant changes were made.

The key change was raising the short-term capital gains (STCG) tax on equity from 15% to 20% and increasing long-term capital gains (LTCG) from 10% to 12.5%. It also eliminated indexation on real estate. In this blog, we will cover all the tax rates that NRIs face on Indian investments. We will also discuss the areas where you can claim benefits of the DTAA treaty.

Master Tax Reference Table for All Investment Asset Classes

Consider the table below as a quick reference for all the major NRI investment taxation:

1. Equity

2. Debt & Fixed Income

3. Real Estate

4. Other Investments

The aforementioned rates are base rates before surcharge and 4% cess. The effective TDS rates are higher. Moreover, the rates apply to transactions made on or after 23rd of July, 2024. The DTAA may provide lower rates wherever applicable.

Tax on Equity Shares (Listed Indian Companies)

For NRIs, equity shares of Indian listed companies are the most actively invested assets. The tax rates are clear, but the changes after Budget 2024 are significant. The table below lists the tax applicable to equity shares based on the type and holding period:

Before moving further with another tax rate, let's first understand what the securities transaction tax is.

Securities Transaction Tax (STT)

STT or securities transaction tax is charged at the time of buying or selling shares on a stock exchange. For NRIs, STT applies the same as for residents. The presence of STT on a transaction is what qualifies the gains for the concessional 20%/ 12.5% rates. NRIs who are trading via PIS (Portfolio Investment Scheme) accounts are liable to pay STT on all exchange transactions.

Mutual Fund Taxation for NRI (Equity, Debt, and Hybrid)

Mutual fund taxation for NRIs includes three completely different regimes based on the fund's equity allocation and the purchase date. It is considered the most complex area of taxation for investment for NRIs. Let's understand the tax applicable to equity, debt, and hybrid-oriented funds for NRIs.

Equity-Oriented Funds (Equity ≥ 65%)

The table below lists the tax rate and TDS for NRI based on the type of gain for investments made to an equity-oriented fund:

Debt-Oriented Funds

The table below lists the tax treatment for investments made by NRIs in debt-oriented funds based on the purchase date:

Hybrid and Other Fund Categories

The table below lists the tax treatment and equity for investments made for hybrid-oriented funds and other fund categories:

This is how the tax on mutual funds will be taxed for NRIs. Moving further, let's know the tax applicable to real estate and property.

Tax on Real Estate & Property

In Budget 2024, real estate capital gains for NRIs underwent the most significant change, which is the removal of indexation. NRIs selling an Indian property on or after 23rd of July, 2024, can no longer raise the cost of acquisition to account for inflation. It means a larger absolute gain is now taxable.

If an individual is buying a property from an NRI, they must legally deduct TDS on the full consideration and not just the capital gain. The buyer must deduct it at the applicable rate, which is 12.5% for LTCG or 30% for STCG. It is one of the most cash-flow challenging aspects of NRI property sales.

To reconcile the actual capital gain and to claim a refund (in case the TDS was computed on a higher base), the NRI must file an ITR. Moving further, let's see the tax rate applicable to interest income.

Tax on Interest Income (NRE, NRO, FCNR, Bonds)

The table below lists the tax treatment for interest income earned on NRE, NRO, FCNR, and bonds:

NRE and FCNR account interest is completely tax-free in India. Conversely, NRO account interest is taxable at your applicable slab rate, and Indian bonds are taxed as per their specific issue guidelines. Let's now discuss some strategies for NRI investors to save tax.

Tax-Saving Strategies for NRI Investors

Here are some strategies for NRI investors to save a significant amount on taxes:

Priorities NRE FD and FCNR deposits for fixed-income goals: These are the only confirmed, completely tax-free fixed income options in India. For most NRIs in the 20-30% tax bracket, these beat debt funds at 6.5% - 7.5% (now taxed at the slab rate) on an after-tax basis.

Collect ₹1.25 lakh in equity LTCG tax-free every year: To collect up to ₹1.25 lakh in LTCG, sell equity holdings each financial year, which will remain completely exempt. After that, reinvest immediately. This will help reset the cost base and avoid the deferred tax on accumulated gains, compounding the after-tax wealth.

Set-off Capital Losses Before 31st of March: Short-term capital loss (STCL) can be set off against both STCG and LTCG. However, long-term capital loss can only be set off against LTCG. Moreover, the unused lossess are carried forward for 8 years. To reduce your current-year tax liability, you must review your portfolio before-year end and book losses in underperforming investments.

Use the Capital Gain Account Scheme (CGAS): If you cannot reinvest within the Section 54/54F timeline, use the CGAS before the ITR deadline. Even if the actual property purchase takes 12-24 months, this safeguards your Section 54/54F exemption claim.

Apply DTAA Rates Proactively: Before the payment/maturity date, submit TRC + Form 10F to your Indian bank, AMC, and any company paying dividends. Avoid the default 31.2% TDS on NRO interest when the DTAA rate may be 12.5 - 15%.

Apply for a Lower TDS Certificate Before Selling Property: Apply for the AO for a certificate if your actual LTCG is significantly lower than the sale value. This certificate will help reduce TDS from 12.5% of the full sale value to the actual tax on your gain. This will avoid significant overcollection of TDS and 12-18 month refund waits.

Consider Sovereign Gold Bonds (SGBs) for Gold Allocation: SGB maturity proceeds (at the end of 8 years) are completely exempt from capital gain tax. The annual 2.5% coupon is taxable. However, the capital appreciation on maturity is exempt from taxation. This makes SGBs the most tax-efficient gold investment vehicle for NRIs.

The Bottom Line

The post-Budget 2024 tax framework demands that NRIs move from passive investing to active tax management. The rules are more subtle across every asset class, equity, real estate, debt, and interest income. Also, in several cases, the rules are more punishing than before. However, NRIs can still build significant after-tax wealth in India by using NRE/FCNR accounts, timing equity gains within the exemption window, applying DTAA proactively, and using schemes like CGAS and SGBs.

Moreover, to easily navigate NRI tax obligations on NRI investments in India, consult a qualified tax advisor and expert at Savetaxs. We have a team of experts who are familiar with both Indian tax law and the rules of your country of residence to ensure you stay compliant. Contact us right away and fulfill your tax obligations with confidence, and avoid any legal issues.